Financial statements or reports are formal records of a company’s financial outcomes. Four basic financial statements – a balance sheet, an income statement, statement of retained earnings and statement of cash flows – give an overview of the financial condition of any business, both in the short term and the long term. A balance sheet gives a sneak preview of the company’s finances. The balance sheet is the only financial statement that conforms to a specific point in time.

Assets, liabilities and ownership equity are part of a company’s balance sheet; they are listed with respect to a specific date, usually the end of a financial year.

A balance sheet essentially provides information on the balance between assets placed in one section, and the liabilities and net worth placed together in another section. Equity is the difference between the assets and liabilities and is the net worth of the company and assigns value to the company’s finances. Each account or line has an individual place in the balance sheet, and incorporates values. The double entry book keeping system is used to maintain these accounts with values entered in them.

In a personal balance sheet, at the end of a financial year, one can calculate the profit and loss by calculating the balance at that point of time. Similarly, in a company’s balance sheet, the profits can be measured by withdrawing the bank balance at the end of the period and including any other cash remaining. Nevertheless, real world businesses also have liabilities and thus are not paid in cash instantly. Instead, inventories are built depending on the goods and products. Inventories also consist of buildings and equipment involved in the functioning of the company. Businesses have such assets that cannot be immediately liquefied into cash at the end of any time period. Businesses work on a chain basis and suppliers, tax authorities, proprietors etc are involved, and money is constantly in rotation. A proprietor never takes in all the capital or profits every term end.

Balance sheets can be of various types like personal balance sheets, small business balance sheets, large corporate balance sheets etc. For large companies, the complex financial statements include descriptive notes to the statements and include management discussion and analysis.

Individual balance sheets

Imagine managing your own finances. A personal balance, therefore, is the simplest form of recording one’s finances. It lists balance in hard cash pertaining to checking accounts and savings accounts, in terms of short term assets and common stock, and real estate in terms of long term assets. Loan and mortgage debt due or overdue long term loans, etc. are included in current or long term liabilities. Security plans and real estate values are calculated based on the immediate market value that changes periodically. Net worth is again the difference between personal assets and liabilities.

Company balance sheets

A small business balance sheet contains several fields to list current assets, which would also include accounts receivable, and inventory along with cash. It would additionally include tangible and fixed assets such as land, buildings, and equipment as well as intangible assets such as patents. Liabilities in such cases would include accounts payable, accrued expenses, and long-term debts. The footnotes in the balance sheet would contain information about contingent liabilities. The equity is calculated in the usual manner.

The function of balance sheets

An income statement summarizes operations over a time period while a balance sheet provides basic, direct and sensitive information about the immediate profit and loss incurred.

Reviewing the balance sheet requires balancing the inventories and accounts receivable in one hand, and on the other keeping a watch on the liabilities in terms of debts and accounts payable. Extensive growth of inventories means most of them are obsolete, and if sales are persistently lesser than accounts receivable, then there might be a hierarchical problem in controls and credit policies. The long term and short term debts on the liabilities side also should be balanced.

The numerical analysis is followed by assessing the comments made by the management, stating any unusual increase or decrease in inventory or sales. These analyses may also have the management’s perspective about the future business prospects and should be considered as constructive comments.

The balance sheet plays an effective role in investment decision making due to simplification of information, and thoughts on investments and holdings, etc. are noted and can be reflected upon later.

A consolidated balance sheet of a company lists assets, liabilities, equity information, with all the accounting components of each entity. It offers financial information of the firm and also its subsidiaries, and presents the entire data as a consolidated report. Some of the most common entries in a consolidated balance sheet are short term investments [...]

A consolidated balance sheet of a company lists assets, liabilities, equity information, with all the accounting components of each entity. It offers financial information of the firm and also its subsidiaries, and presents the entire data as a consolidated report. Some of the most common entries in a consolidated balance sheet are short term investments [...]

The income statement is one of the important financial statements of a company. It is basically a snapshot of the inflow and outflow of the company’s assets. Net income and net loss are calculated from the inflow and outflow values. Ideally, the revenues generated by the company are classified as inflow, while all expenses are [...]

The financial health of any company can be determined by its balance sheet. The balance sheet is an important accounting tool that gives a clear view about how much the business is worth. For beginners in the world of finance and accounting, it is essential to understand how accounting balance sheets can be used to [...]

A company balance sheet  summarizes all its financial transactions over a specific period of time. One may ask why this plays a critical role in financial planning. As a matter of fact, a company balance sheet is a snapshot of its current financial state and serves as a benchmark for future financial planning. Since every [...]

Balance sheets offer critical information about the current financial status of a company. Also referred to as the financial statement, the transactions made by the company over a specific period of time are listed in these sheets. Expressed as an equation, balance sheets calculate the company’s debts and assets. A balance sheet analysis tells you [...]