Balance Sheet: Meaning, Explanation, Components and Example

Balance Sheet : Meaning,

Explanation, Components and

its Calculations with Examples

What Is a Balance Sheet?

A balance sheet is a type of financial statement that shows the assets, liabilities, and shareholder equity of a business at a certain point in time. The foundation for calculating investor rates of return and assessing a company's capital structure is its balance sheet.

The balance sheet, to put it briefly, is a financial statement that shows a company's assets and liabilities as well as the amount of money invested by shareholders. Financial ratio calculations and fundamental analysis can be performed on balance sheets in conjunction with other significant financial statements.

KEY KNOWLEDGE

A financial statement that lists an organization's assets, liabilities, and shareholder equity is called a balance sheet.
One of the three primary financial statements used to assess a company's performance is the balance sheet.
It offers a quick glance into the assets and liabilities of a business as of the publishing date.
The assets on the balance sheet are equal to the sum of the liabilities and shareholder equity.
Financial ratios are computed by fundamental analysts using balance sheets.

Work of Balance Sheets

An overview of the financial situation of a corporation at any given time is given by the balance sheet. On its alone, it is unable to convey the impression of the trends developing over a longer time frame. The balance sheet ought to be compared to those from earlier times because of this.

The debt-to-equity ratio, the acid-test ratio, and many other ratios that may be obtained from a balance sheet can be used by investors to gauge the financial health of the firm. Any comments or addenda in an earnings report that may make reference to the balance sheet can offer helpful context for evaluating a company's finances, as do the income statement and statement of cash flows.

The balance sheet is in line with the accounting equation, which states that assets + liabilities plus shareholder equity balance out on one side.

Assets=Liabilities+Shareholders’ Equity

This formula makes sense. This is due to the fact that an organization must either borrow money (assuming liabilities) or take it from investors (issue shareholder equity) in order to pay for all it has (assets).

Special Considerations

A company's balance sheet contains details on its assets, liabilities, and shareholder equity, as was previously mentioned. Always keep the assets, liabilities, and shareholder equity equal. The term comes from the idea that the balance sheet should always balance. If they are out of balance, there might be a number of issues, such as inaccurate or missing data, mistakes in inventory or exchange rates, or improper computations.

Each category breaks down the intricacies of a company's finances into several smaller accounts. These accounts change greatly according on the industry, and based on the type of firm, the same terminology may have distinct meanings. However, investors are likely to encounter a few similar components.

Components of a Balance Sheet

ASSETS

ASSETS	PARTICULAR
Inventory	Raw materials, finished products, etc.
Prepaid expenses	Items of value for which the company has already made a payment, like business insurance, office rent, etc.
Marketable securities	Investments that a business can sell off within a year.
Accounts receivable	Money that a client of a business owes it for short-term payment of services supplied.
Cash and cash equivalents	Currency, cheques, and money conserved in a company's checking and savings accounts.

LONG-TERM ASSETS

Fixed assets	Machinery, buildings, property, etc.
Intangible assets	Patents, copyrights, franchise agreements and more.
Long-term securities	Investments that a company cannot sell within a year.

Shareholders’ equity

Retained earnings : It is the amount of a company’s gains that are reinvested into its business instead of returning to the shareholders in the form of dividends.

Share capital : This is the amount of capital that a company receives for the purpose of business.

What are the features of a balance sheet?

All of a company's assets and liabilities are shown on its balance sheet. It demonstrates their worth and characteristics, allowing you to determine the capital's location on a given day. It does not, however, display any earnings or outlays.

The formula "Asset = Liability + Capital" is used to create balance sheets, and it always has equal amounts on both sides.

It considers the current and personal account balances of a corporation, including credit and debit. The credit balance is referred to as a business's obligations and is included in the personal account. In contrast, the debit balance is referred to represent a business's assets and falls under the real account.

The balance sheet is typically prepared by a company's accountants on the final day of the financial year. This is the case because it is the last stage of final accounting and requires the compilation of a profit and loss account in addition to an evaluation of the business's trade.

Importance of Balance Sheet ?

Assist banks in evaluating a firm’s net worth

A company looks to banks for loans when it wants to grow and make further investments. In these situations, the banks will review the company's balance sheet to see if it is in a position financially to repay the loan debt.

Helps investors take decisions

While choosing a firm for the purpose of investment, a majority of investors look at the company’s balance sheet to determine its financial position. Moreover, they combine it with various other factors to assess the firm’s future growth potential.

Serves as a determiner for risk and returns

If you operate a business, keeping track of your balance sheet will help you assess how easily you can pay your short-term debt. Additionally, if your company's obligations are increasing quickly, you may control them to reduce the likelihood of bankruptcy.

Enables financial analysis

A sound balance sheet will provide you a clear picture of your company's financial situation. You may thus see your company's cash flow, working capital financing, trade receivable status, and the amount of daily transactions your company can afford.

Example Of Balance Sheet

LIABILITIES	VALUE	ASSETS	VALUE
Current Liabilities	---	Current Asset	---
Accounts Payable	***	Cash	***
Notes Payable	***	Petty Cash	***
Interest Payable	***	Prepaid Insurance	***
Wages Payable	***	Supply	***
Tax Payable	***	Inventory	***
Unearned Revenue	***	Accounts Receivable	***
Bonds Payable	***	Long-term Investment	***
Long-term Liability	***	Accumulated Depreciation	***
-	-	Equipment	***
-	-	Building	***
-	-	Land	***
Total Liability	*****	Total Asset	*****
Common Stock	***	Intangible Asset	***
Retained Earnings	***	Goodwill	***
-	---	Other Assets	***
Total Liabilities	*****	Total Assets	*****

Difference between trial balance and Balance Sheet

Trial Balance	balance Sheet
A trial balance is not included in a company's final account and is not a financial statement.	The balance sheet is a financial statement that is an important component of a company’s final account
It is made for use within the company It is made for the company’s external affairs	All its accounts are divided into debit and credit balances All its accounts are divided into equity, liabilities and assets
It keeps track of all general ledger accounts' closing balances.It lists the assets, liabilities, and equity of a business.	Its goal is to confirm that all ledgers' total debits and credits are in balance. Its goal is to ascertain if the company's assets match the total of its liabilities and equity.
Regarding trial balances, there isn't any set layout guideline.There's a precise arranging format for balance sheets.	recorded at the conclusion of each quarter, half-year, and year.documented at the conclusion of each fiscal year
The auditor's signature is required.	The auditor's signature is not mandatory

FREQUENTLY ASKED QUESTIONS

Owner’s equity is a part of the three main sections that constitute a sole proprietorship’s balance sheet.

No, current assets do not include security deposits. The reason for this is that renters must register the security deposit as a long-term asset if they intend to remain in the apartment for more than a year. Consequently, on a balance sheet, it is a non-current asset that is included under "Other Assets."

Accumulated depreciation is the life-to-date depreciation that reduces the book value of an asset.

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