What is balance sheet? Definition, example, explanation

Balance sheet is a general financial report, reflecting the entire existing assets and capital sources to form the assets of the business at a given time.

What is balance sheet?

Balance sheet is a general financial report that generally reflects all existing assets and capital sources to form assets of a business at a given time.

balance-sheet1

The balance sheet is an extremely important financial document. It helps investors, business owners monitor the situation of that business, then come up with appropriate business strategies.

Making a balance sheet is a very familiar job for accountants. However, in addition to mastering balance sheet preparation, accountants also need to master the meaning and understanding of the elements present in the balance sheet.

Related terms

Financial statements summarize important financial data of the business in a certain period.

According to the current financial regime, the enterprise’s financial statements include:

– Accounting balance sheet

– Report on business results

– Statements of cash flows

– Notes to financial statements

Nature of balance sheet

The balance sheet reflects data on the total value of all assets and available capital of the enterprise at the time of making financial statements. Therefore, people see the balance sheet as a snapshot of all financial resources of a business at a time, usually at the end of the year, at the end of a quarter or at the end of a month.

See also: What is inventory turnover? Meaning of Inventory turnover

Structure of balance sheet

The balance sheet is divided into two parts of assets and capital sources according to the balance principle:

Total assets = Total resources.

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The presentation of the balance sheet is as follows:

balance-sheet-example

Assets section: Assets sorted in descending order of liquidity. Accordingly, the assets with high liquidity are arranged at the top of the table and gradually decrease when moving downwards.

Liabilities section: is arranged according to the urgency of the claim. Therefore, capital sources are arranged in order from debt capital to equity source. Debt sources include appropriated capital and borrowed capital (collectively, liabilities). Debt capital sources are ranked in order of: Short-term debts, medium and long-term debts.

Content of balance sheet

All assets must be financed with some kind of funding, such as debt capital or equity. Each section has its own economic and legal implications.

About the assets section

– In legal aspect: The asset section reflects the value of all existing assets at the time of reporting, under the management and use of the enterprise.

– Economically: The figures in the assets section must reflect the size and structure of the existing types of capital and assets of the enterprise at the time of making the report in a material or non-material form such as capital. in cash, accounts receivable, inventory, fixed assets … Through that, it is possible to evaluate in general the size of capital and the level of capital allocation used by the enterprise.

About the liabilities section

– In terms of legal aspect: The source of capital reflects the sources of existing assets of the enterprise at the reporting time. Thereby shows how much the enterprise has legal liability to pay for debt and creditors know the limit of the owner’s liability for the debts of the business.

– In economic aspect: The data in the capital source section show the size and structure of the capital sources invested and mobilized in production and business activities, investment activities of enterprises. Thereby, it is possible to generally evaluate the level of financial autonomy and the ability to financial risks of the business.

Having a firm grasp of the legal and economic aspects of the balance sheet figures helps to understand the significance of a firm’s financial ratios.

Limitations of the Balance Sheet

– Balance sheet reflects book value of assets, is prepared on the principle of cost (historical cost); Therefore, it is difficult to have a match between book-based asset value and market value.

– The balance sheet only reflects the data at the time of making financial statements (the beginning of the period, the end of the period), so if only based on the data on the balance sheet, it will be difficult to assess the movement of the type of assets and capital in both periods or periods.

Summary

Here, you can see that the balance sheet is extremely important for every business. Looking at it, you can assess the financial status, situation and results of business production; the level of capital use, opportunities and prospects of the enterprise; the increase or decrease in the equity capital of the enterprise. Hope the above article of Fastloans.ph has helped you understand more deeply about the balance sheet.

See also: What is Profit margin? Synthesize information about profit margins

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