What is Balance Sheet
Balance Sheet is one of the important instruments used to measure the financial state of a company. It helps investors decide whether to invest in the company. Let us have a detailed study on what is Balance sheet with its format, analysis and formula in order to make it effectively
It is a financial record designed to precisely express how much a company is worth, also known as book value. You can get a company’s balance sheet by calculating and listing out all the assets and liabilities of the company and owner’s equity of a specific date, also known as reporting.
Generally, it is designed and submitted every three months or monthly. It depends on the reporting prevalence as decided through law or company. It will help you to measure the company’s stock and index.
Here's a quick look at what you'll read
A balance sheet is a financial record designed to precisely express how much a company is worth, also known as book value.
It creates to determine whether a company is growing or failing. Based on this data, an internal audience can turn their methods and policies: into folding down on successes and correcting failures.
- ASSETS
- Liabilities
- Shareholder Equity
Asset= Liabilities + owners equity.
Owners equity = Assets-Liabilities
Liabilities = Assets -owners’ equity
With the help of a balance sheet, you can check several useful detailed information about the company like debt and equity ratios, financial health, growth aspects, liquidity, etc.
Objectives of Balance Sheets
A specific balance sheet summarizes a business at a given time. It pictures a company’s financial position as split into assets, liabilities, and equity. It has two different objectives depending on the review of the audience.
When a balance sheet is a technical analysis tool checked internally by a company leader, essential stakeholder, or any employee, it creates to determine whether a company is growing or failing.
Based on this data, an internal audience can turn their methods and policies: into folding down on successes, correcting failures, and shifting towards fresh opportunities.
When a balance sheet examines externally by a company person, it creates to determine what resources are available to a company and how to finance them. Based on this data, possible investors can determine whether it would be intelligent to fund a company.
Also, it is possible to support the data in the statement to figure out the essential metrics like liquidity, debt-to-equity ratio, and profitability.
External auditors may utilize this statement to secure a business conceding through any reporting rules and regulations as a subject and formulate their trading strategies. It is also essential to recognize that the financial statement displays data on a particular date. It is consistently based on past data through its essence.
While investors and company holders may utilize a balance sheet analysis to indicate the performance of the future, there is no guarantee of future results through past performance.
Balance sheet formula
The equation will often be recognized according to the given equation:- Asset=Liabilities + owners equity.
This equation is the most common formula and the only collection method. Here is the data you may encounter:-
Owners equity = Assets-Liabilities
Liabilities = Assets -owners’ equity
There should be a balance. Assets should always equal liabilities plus owners’ equity. And owner’s equity should always equal assets minus liabilities. Liabilities should always equal purchases minus owner’s equity.
The document was likely wrong if a balance sheet didn’t balance. Generally, errors expects to be incomplete or missing data, incorrectly entered transactions, errors in rates of currencies or inventor levels, amortization, or miscalculated depreciation.
Components of balance sheet format in value
To understand the concept of what is balance sheet it is important to study its categories. Here is the study of its detailed components, such as assets, liabilities, and owner’s equity.
Assets
Assets are anything intrinsic held and owned through a company and its quantifiable value. It is generally added as a positive (+) to the balance sheet. There are various types of assets mentioned below
- Cash:- It is a type of government debt held by the company and consider the most liquid asset.
- Account receivable:- Money is paid to the business or company through its customers, factoring in any anticipation of money unlikely to be paid.
- Inventory: It is goods open for sale, Generally valued at their market cost, which is mostly lower.
- Fixed assets:- Include land and machine
- Intangible assets:- Assets that are non-tangible such as intellectual property
- Long-term securities:- Securities do not easily dissolve or liquidate
- Marketing securities is a debt and equity that can trade on a liquid market.
Liabilities
There are various types of Liabilities mentioned below.
Long-term debt is a bond or interest the company pays to other lenders within a year or after.
Tax payable:- Taxes which pay by the company but not immediately
Pension funds:- collections of savings earned during someone’s working life.
Shareholder Equity
Shareholder equity is also called owner’s equity. It shows the money that will return to the company’s shareholders after any liabilities are accounted for and all the company assets are paid off.
There are various types of shareholder equity given below.
Shared: Shares are the company capital divided and distributed between the owners equally, and the profit is being earned, which is equally allocated between them.
Retained earnings:- This type of earnings reinvesting later in the company or used to fully pay its current debt.
Treasury shares:- These shares are purchased back by the company and reduce the number of outstanding shares on the available market.
Final words
You now understand what is a balance sheet and its importance. The best way to analyze it is to compare it with previous records, examining which method the figures have switched over time. You can also analyze the balance sheets of other same companies.
With the help of a balance sheet, cash flow statement you can check several useful ratios, like debt and equity ratios. This ratio estimates a company’s financial support. You divide the liabilities of a company by company equity to find it.