The balance sheet statement of balance is a report of the financial situation of a company that details the liabilities, assets, and equity of the owners at a certain date. The balance sheet reveals a company’s net worth.
Find out more about the meaning of a balance sheet and how it operates in the event that you require one and see an illustration.
What is a Balance sheet?
It is the most significant of the three financial statements that are used to show the financial health of a company. Two other statements include the income statement and the cash flow statement.
A balance sheet can help analysts and business professionals assess the financial health of a business and its capacity to cover its operational expenses. The balance sheet to figure out how to pay your financial obligations, as well as the best methods to utilize the credit you have to fund your business.
The balance sheet could contain details from previous years, so you can conduct back-to-back comparisons over two years. These numbers will allow you to monitor your progress and find ways to improve your financial position and identify areas you can make improvements.
How does a Balance Sheet Work
Every account in the general ledger is classified as either an asset or liability or equity. The balance sheets vary based on the type of business, however generally, the balance sheet is split into three categories.
Assets are usually categorized into liquid asset categories, those that are cash or are easily converted to cash, and other assets which are not easily transformed into cash, like buildings, land, or equipment. They could also comprise intangible assets like franchising agreements, copyrights, or patents. 1
The liabilities are the money owed to the company and are broken into both current and long-term categories. Current liabilities are the ones due within one year. They comprise things like the accounts payable (supplier invoices) as well as salaries, income tax deductions pension plan contributions medical plan reimbursements as well as building and equipment rental, and customer deposits (advance payments for the delivery of goods or services to be provided) utility bills, short-term lines of credit, loans as well as maturing debt, interest sales tax, and/or tax on services and goods applied to transactions. 2
Long-term liabilities refer to those which are due within the end of a year. They could include tax-deferred liabilities as well as any debt with a long-term term like principal and interest on bonds, and pension fund obligations. 3
Equity also referred to as shareholders’ equity, also known as owners’ equity or equity, refers to that left after subtracting liability from the asset. Retained earnings are the earnings that are retained by the business, which is the company does not pay shareholders as dividends.
Retained earnings are utilized to repay debts or to invest in the company to make use of growth opportunities. When a company is in growth, these earnings are usually employed to finance expansion, rather than being paid in dividends to investors. 4
Sample Balance Sheet
Name of the company
BALANCE SHEET POSTED a day before ____ (Date)
|Actual Assets||Current Liability:|
|Cash in the Bank||$18,500.00||Accounts Payable||$4,800.00|
|Petty Cash||$500.00||Earnings Payable||$14,300.00|
|Net Cash||$19,000.00||Office Rent||—|
|Accounts Receivable||$5,300.00||Federal Income Taxes to be paid||$2,600.00|
|The Total Assets Current||$55,200.00||Customer Deposits||$900.00|
|Fixed Assets||Union Dues to be paid||—|
|Buildings||$330,000.00||Sales Tax Payable|
|The Depreciation is less||$50,000.00||Total Current Liability||$24,950.00|
|Net Land & Buildings||$430,000.00|
|The Depreciation is less||$35,000.00||Mortgage||$155,000.00|
|Net Equipment||$33,000.00||Total Long-Term Liability||$195,000.00|
|Owner – Draws||$50,000.00|
|The Total Owners’ Equity||$298,250.00|
|Total Assets||$518,200.00||LIGILITIES and EQUITY||$518,200.00|
Do I need a Balance Sheet?
A current and accurate balance sheet is crucial for any business owner who is looking for additional equity or debt financing, or who wants to sell their business and wants to know the net worth of the business.
Corporate companies are required to provide balances sheets, income, and balances as well as cash flow reports financial reports to shareholders, the tax authorities, and regulators. 1 Preparing balance sheets isn’t required for sole proprietorships as well as partnerships, however, it is essential for monitoring the performance of the business.