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Our article, in which we explain all questions such as what is the balance sheet, what is the balance sheet used for, and by whom is it prepared, is on our website.

 

Table of Contents

Balance Sheet

What is a Balance Sheet?

Articles to Take Note 

Formula Used for a Balance Sheet

What's On the Balance Sheet?

Assets

Liabilities

Shareholders' Equity

What is the balance sheet used for?

What is included in the balance sheet?

Who prepares the balance sheet?

 

What is a Balance Sheet?

A balance sheet is a financial statement that reports a company's assets, liabilities and equity at a given time and provides a basis for calculating revenue ratios and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders. 

Thanks to the balance sheet, fundamental analysis can be made or used together with other important financial statements such as income statement and cash flow statement in calculating financial ratios.

 

Articles to Take Note 

  • A balance sheet is a financial statement that is reporting a company's assets, liabilities and equity.
  • The balance sheet is one of the three basic financial statements (the income statement and the cash flow statement are the other two) used to evaluate a business.
  • A balance sheet is a snapshot that represents the state of a company's finances (owned and owed) as of the date of publication.
  • Fundamental analysts use balance sheets along with other financial statements to calculate financial ratios.

 

Formula Used for a Balance Sheet

The balance sheet depends on the following accounting equation, in which assets are balanced on one side and liabilities plus equity on the other. This equation is as follows.

Assets = liabilities + Shareholders’ Equity

A company has to pay off everything it owns, either by borrowing it or getting it from investors. For example, let's consider a company. If this company took a five-year $4,000 loan from a bank, its assets would have increased by $4,000. Its debts will also increase by $4,000, balancing both sides of the equation. If the company receives $8,000 from investors, its assets and equity will increase by that amount. All revenues of the company in excess of its expenses will go to the equity account. These revenues will be offset by assets that appear as cash, investments, inventory or some other asset. 

 

What's On the Balance Sheet?

A balance sheet is an image that represents a company's financial condition over a period of time. By itself, it cannot give an idea of emerging trends over a longer period of time. Therefore, the balance sheet should be compared with previous periods. It should also be compared to other businesses in the same industry, as different industries have unique approaches to financing.

 

A range of ratios can be drawn from the balance sheet and helps investors understand how healthy a company is. These include the debt-to-equity ratio and the acid test ratio, among others. The income statement and cash flow statement, like any note in an earnings report that may refer to the balance sheet, provide valuable context for evaluating a company's finances.

 

Assets

In the Assets segment, accounts are listed from top to bottom according to their liquidity, i.e. ease of conversion into cash. Here is the general layout of your accounts in current assets:

  • Cash and cash equivalents are the most liquid assets and can include Treasury bills and short-term certificates of deposit, as well as stable currency.
  • Securities are stocks and debt securities that have a liquid market.
  • Accounts receivable refers to money that customers owe the company, including an allowance for doubtful accounts, as a certain number of customers can be expected not to pay.
  • Inventory is available for sale goods valued at the lower of cost or market price.
  • Prepaid expenses represent value already paid, such as insurance, advertising contracts, or rent.

 

Liabilities

Liabilities are money a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds it issues to creditors for rent, utilities, and salaries. Current liabilities are liabilities that are due within one year and are ordered by maturity. Long-term liabilities become due at any point after one year.

Current accounts payable may include:

  • current portion of long-term debt
  • bank debt
  • interest payable
  • fees payable
  • customer prepayments
  • dividends payable and others
  • earned and unearned bonuses
  • accounts payable

 

Shareholders' Equity

Equity is money attributable to the owners, i.e., shareholders, of a business. Also known as "net assets". Because it is equal to a company's total assets minus its liabilities, i.e., its debt to non-shareholders. Retained earnings are net earnings that a company reinvests in the business or uses to pay off debt. Some companies issue preferred stock, which will be listed separately from common stock under equity. Preferred stock is assigned an arbitrary par value.

 

Frequently Asked Questions

 

What is the balance sheet used for?

The balance sheet is an important tool used by managers, investors, analysts and regulators to understand the current financial condition of a business. It is often used in conjunction with two other types of financial statements: income statement and cash flow statement. Balance sheets allow the user to see the company's assets and liabilities at a glance.

 

What is included in the balance sheet?

Depending on the company, this includes short-term assets such as cash and accounts receivable; or long-term assets such as property, plant and equipment. Similarly, debts can include short-term liabilities such as accounts payable and fees payable, or long-term liabilities such as bank loans and other debt obligations.

 

Who prepares the balance sheet?

Depending on the company, different parties may be responsible for the preparation of the balance sheet. For small private businesses, the balance sheet can be prepared by the owner or a company accountant. For medium-sized private firms, it may be audited by an external accountant. Publicly traded companies, on the other hand, must obtain external audits from financial advisors and ensure that their books are kept to a much higher standard. Balance sheets and other financial statements of publicly traded companies must be prepared in accordance with Generally Accepted Accounting Principles and filed regularly with the Securities and Exchange Commission.

 

In conclusion, we have included all the questions about the balance sheet in our article today. We hope that this blog post will be beneficial for you. We will continue to create useful works in order to get inspired by everyone. We are sure that we will achieve splendid things all together. Keep on following Finage for the best and more.


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