In financial accounting, a balance sheet is also known as a statement of financial position or a statement of financial condition.
The balance sheet is one of the most important components in a company’s financial statements because it contains information related to assets, payment obligations, and capital.
Then, what is meant by a balance sheet?
Let’s look at the discussion further in the following article!
You will understand what a balance sheet is, its benefits and types.
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What is a Balance Sheet Report?
A balance sheet is a summary of the financial balances of an individual or organization, whether it is an sole proprietorship, a business partnership, a corporation, a limited liability company. company or other organization.
Assets, liabilities and ownership equity are recorded for a certain period in accounting reports which can be done easily if you use a financial reporting application .
The balance sheet is often likened to a “picture of the financial condition of an organization or company”.
The balance sheet is usually calculated quarterly, six months or a year.
In the balance sheet there are two main points, namely assets and liabilities. Let’s understand each one first.
What is an asset? Assets are all resources owned by the company and are divided into current and non-current assets or long-term assets.
While liabilities are debts owned by a company and must be paid to creditors.
There are two types of liabilities, namely current liabilities and long-term liabilities.
Another important point in the balance sheet is equity which is the owner’s right to the assets of a company after deducting the amount of liabilities or liabilities.
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How is the Balance Sheet Report Structured?
In general, the structure of the balance sheet consists of current assets, long-term assets, current liabilities, long-term liabilities and equity.
Here’s an explanation:
1. Current Assets
Current assets are wealth that is easy to convert into cash or cash.
The information should be listed on the first line of the balance sheet.
This account includes the credited balance of all sales revenue, net of allowance for receivables.
When the company has recovered the receivables, this account will decrease, and cash will increase by the same amount.
Current assets in the company can be in the form of inventory or inventory that can be managed with the goods inventory application .
Inventories in question include raw materials, goods in process, and finished goods.
Companies use this account when reporting sales of goods, generally below cost of goods sold in the income statement.
This report is one of the company’s main financial reports that shows profits and losses over a certain period or period.
2. Non-Current Assets
Property, plant, and equipment (also known as PP&E) are tangible fixed assets of a company.
Some companies will classify them based on different types of assets, such as land, buildings, and various other types of equipment.
Non-current asset line items also include all of the company’s intangible fixed assets , which may or may not be identifiable.
Identifiable intangible assets include patents, licenses and secret formulas.
While intangible assets that cannot be identified include brands and good relations with other parties.
3. Current Liabilities
Current liabilities represent business payables owned by the company to suppliers for goods or services purchased on credit.
There are also non-trade obligations that have a maturity within one year or within one operating cycle for the company.
For example, if a company takes out a bank loan to be repaid in 5 years, this account will include the portion of the loan that is due in the following year.
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4. Non-Current Liabilities
This account includes the amortized amount (paid off within a certain period or period) of each bond that has been issued by the company.
Non-current liabilities include the total amount of long-term debt.
This account is derived from the schedule of debts owned by the company based on maturity and interest rates.
The financial statements will record the flow of interest expense which describes all the company’s debts, interest expenses, and principal payments for each period.
5. Shareholder Equity
Equity is the value of funds that shareholders have invested in the company.
When a company is first formed, shareholders will usually invest their shares in cash.
Each period, the company can distribute dividends from its net profit. Any remaining amount is added to retained earnings.
The Importance of Balance Sheet Reports
The balance sheet is a very important financial statement for many reasons.
The balance sheet report is important because it can help companies understand their performance.
Here are the reasons why the balance sheet is important:
- To determine the health of a company’s financial management .
- Stakeholders or stakeholders can study the balance sheet to understand the company’s liquidity position and business performance.
- Comparing balance sheets on a regular basis can help determine a company’s growth.
- The balance sheet is an important document that you must attach to get a business loan.
- Analyzing the balance sheet can make it easier for a company to understand its ability to carry out expansion projects and unexpected costs.
- The balance sheet can also help companies know and identify sources of funding, such as equity funding or debt financing.
- Using a balance sheet can allow you to assess how efficiently a company is using its assets.
- Balance sheets can also be used to evaluate how well a company is generating returns.
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Types of Balance Sheets
There are many types of balance sheets that are generally used by accountants. However, some of the most commonly used types are:
1. Classified Format
This type of balance is the most commonly used.
It contains information about assets, liabilities and equity classified into account sub categories.
2. General Format
This format includes information that is generally found in other financial reports.
What makes it different is that there is a special column that shows the ratio of line items to total assets, liabilities, and equity.
This type of balance sheet is commonly used by accountants to view percentages on trend lines, which show the relative changes in accounts.
3. Comparative Format
Using this comparative format will give you a comparative data presentation.
These comparisons are side by side with each other, usually consisting of three parts at each specified time period.
4. Vertical Format
Another type of balance sheet report is the vertical format.
For this format, the report will be presented and include all items related to the three main sections of the balance sheet.
The display is created in a single column which will list the line items in descending order of liquidity.
Making a balance sheet will help a business entity calculate the ratio between “debt to equity”, which will then show the feasibility of the business entity being able or not in an effort to pay its debts with equity.
In addition, the financial ratios that can be shown in the balance sheet which is also the main element is the “current” ratio.
This type of ratio is the amount of current assets that will be divided by current liabilities.
The results obtained will determine whether a business has the ability to pay its debts within 12 months.
Well, that’s an article about balance sheet reports that you can make reference to.
Seeing how important it is to make a balance sheet in every business, it would be nice for you to immediately learn how to make a balance sheet or fix an existing balance sheet to become a more viable balance sheet.