Role of the Balance Sheet in Financial Statements
For every business, you should examine three important financial statements:
The Balance Sheet tells to investors how much money an institution or company has (assets), how much it owes (liabilities), and what is left when you net the two together (book value, net worth, or shareholder equity).
The Income Statement is a record of the company’s profitability. The Income Statement tells you how much money a corporation made or lost.
The Cash Flow Statement is a record of the actual changes in cash it shows you where the cash was brought in and where the cash was disbursed, compared to the income statement.
Defined and usefulness of the balance sheet
A balance sheet shows the financial position of the corporation at the end of every period. It provides information about nature and amounts of investments in enterprise resources, the owner’s equity in net resources and obligations to creditors.
Elements of the balance sheet
- Assets
- Liabilities
- Equity
1- Assets: probable future economic benefits controlled or obtained by a specific entity as results of past events or transactions.
2- Liabilities: probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
3- Equity: Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, equity is the ownership interest.
These elements are then divided into several sub classifications, so the general format of balance sheet as presentation below:
Assets Liabilities and owner’s equity
| Current assets | Current liabilities |
| Long- term investments | Long- term debt |
| Property, plant, and equipment | Owner’s equity |
| Intangible assets | Capital stock |
| Other assets | Additional paid in capital |
| Retained earnings |
The first column lists the category of assets and liabilities, and one lists the total amount for each of those categories. It may even have two years’ worth of information. Oftentimes, assets are listed in order of how quickly they will be converted into cash and liabilities are listed in order of their due dates.
How to Read a Balance Sheet
A balance sheet is composed of rows and columns that list a company’s assets and liabilities, and money owned by shareholders
Example: Present below data of Company’s balance sheet
The Classified Balance Sheet
| The Balance Sheet as of December31, 201? | |||
| Assets | |||
| Current assets | |||
| *** | Cash | ||
| *** | Bank | ||
| *** | Account receivable | ||
| *** | (***) | Less: allowance for doubtful accounts | |
| *** | Notes receivable | ||
| *** | Inventories | ||
| *** | Prepaid expenses | ||
| *** | Total current assets | ||
| Long- term investments | |||
| *** | Long- term securities | ||
| *** | Long- term receivable | ||
| *** | Total long-term investments | ||
| Property, plant, and equipment | |||
| *** | Land | ||
| *** | Building | ||
| *** | (***) | Less: accumulated depreciation | |
| *** | Machinery and equipment | ||
| *** | (***) | Less: accumulated depreciation | |
| *** | Total Property, plant, and equipment | ||
| Intangible assets | |||
| *** | Goodwill | ||
| *** | Trademark | ||
| *** | Total Intangible assets | ||
| *** | Total assets | ||
| Liabilities and stockholder’s equity | |||
| Current liabilities | |||
| *** | Notes payable | ||
| *** | Account payable | ||
| *** | Accrued interest on notes payable | ||
| *** | Accrued salaries, wages and other liabilities | ||
| *** | Income tax payable | ||
| *** | Total current liabilities | ||
| Long- term debt | |||
| *** | Bond payable due after 5 year | ||
| *** | Mortgages and other notes due after 12 year | ||
| *** | Debentures due after 15 year | ||
| *** | Total long- term debt | ||
| Stockholder’s equity | |||
| Capital stock: | |||
|
|
*** |
Preferred ** par value, issued and
outstanding*** shares |
|
|
|
*** |
Common ** par value, issued and
outstanding*** shares |
|
| *** | *** | Additional paid in capital | |
| *** | Retained earnings | ||
| *** | Total stockholder’s equity | ||
| *** | Total Liabilities and stockholder’s equity | ||
Why Is The Balance Sheet Important?
The balance sheet in accounting Software is an important financial statement that provides a snapshot of the financial health of your company at a point in time. You can also look at your balance sheet in conjunction with your other financial statements together to better understand the relationships between different accounts. A balance sheet is important because it provides you that the following insights about your business:
Liquidity
By comparing your business’s current assets to its current liabilities, you’ll get a clear View of the liquidity of your business, or how much cash and amount you have readily available. you mostly want to own a buffer between your current assets and liabilities to cover your short-term financial obligations, with assets always greater than liabilities.
Efficiency
By comparing your earnings or income statement to your balance sheet, you will be able to measure how efficiently your business uses its assets. For example, you can get an idea of how well your company is able to use its assets to generate revenue.
Leverage
Your balance sheet can help you understand how much leverage your company has, which tells you how much financial risk you face. To judge leverage, you can compare the debts to the equity listed on your balance sheet