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Is Your Business In Balance? All About The Balance Sheet

07.26.2006 · Posted in Accounting Articles

A Balance Sheet is a financial document prepared by a business, organization or individual at the end of a fiscal year or other period, which depicts the assets, liabilities and shareholder equity of the company. Based on the double entry bookkeeping system, the balance sheet helps assess the net worth of the company at a given point of time e.g. end of fiscal year or some other arbitrary time. The net worth is arrived at by finding the difference between all the assets owned and liabilities incurred.

A balance sheet is a formal statement depicting the book value of the concerned entity at a particular time. It is prepared internally or by one or more Certified Public Accountants and truly reflects the state of affairs of the entity. It is quite different from an income statement which is a statement about the income and expenses incurred during a particular period of time.

A truly photographic account of the current state of the entity is how a balance sheet may best be described. It is the most used financial statement and, in fact, is the only one that reflects the state of the entity at a given point of time rather than over a span of time. The two basic features of a Balance Sheet are assets and liabilities.

Since the business may own a number of assets in the form of built-up inventories of unsold stock, plant and machinery, buildings and equipment, these are not always readily convertible into cash and so form the core of the asset valuation. On the flip side, there are creditors who need to be paid as well as tax authorities that have tax payments outstanding and these form the liability base. In addition there is the original capital and a share of profits not withdrawn by the proprietors.

Any modern balance sheet will have three main components; assets, liabilities and shareholder equity. It is usual to set out all assets at the top of the balance sheet before presenting the liabilities. The difference between assets and liabilities constitutes the net worth or net assets of the company. This net worth or net assets of the company is equal to the shareholders equity.

Valuing equity suffers from some discrepancies because sometimes the value to a purchaser of a business via the net worth may not be what is revealed by the balance sheet figures, due to unrecorded material facts. This may happen when property has not yet been revalued.

Also, assets may have been valued keeping in mind that the concern will return a profit. Under such circumstances the break-up value of assets may be more than if the business is running into losses. So whenever someone wants to know how a company is doing, a well documented and accurate answer is very desirable. And the best way to showcase the entity’s success is through its balance sheet.

A lot of people as well as different organizations will surely be interested in the performance of various companies and so they turn to the company’s balance sheet for more information. In addition, the owners of entities are also constantly keeping track of how their enterprises are doing. Creditors, before extending credit, would like to assure themselves that the enterprise will repay the credit. Everyone with any interest in financial dealings with an entity will, of necessity, turn to the balance sheet for guidance.

Balance sheet is the common title of this financial document but Statement of Financial Position is also one other term used to describe it.

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