All You Need to Know about Balance Sheets

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Balance sheet:

A balance sheet is a financial statement of a company. It includes assets, liabilities, equity capital, total debt etc. at a particular point in time. It includes assets on one side and liabilities on the other.

Simply put, it is a snapshot of the financial status of a company at any given time. It is usually calculated every quarter, six months or a year.  

We understand that maintaining a financial report of your company and managing all the funds is no cakewalk. To make it simpler, we have created a quick guide which will help you understand everything about the Balance Sheet, so that next time when you create your statement, you are at ease!

What is a balance sheet?

A balance sheet is a financial statement of a company. It includes assets, liabilities, equity capital, total debt etc. at a particular point in time. It includes assets on one side and liabilities on the other.

Simply put, it is a snapshot of the financial status of a company at any given time. It is usually calculated every quarter, six months or a year. 

Objectives of a balance sheet 

No matter if you are a business owner or just starting with one, it is essential to know why should you have a balance sheet. Balance sheets are helpful to:

  • Present the actual financial position of your business 
  • Keep a track of the debits and credits
  • Evaluate the value and position of all the assets and liabilities
  • Know the amount of capital owed to the owner at the year-end
  • Use as a reference in case a requirement for a loan arises 
  • Know the trend of liquidity and the profit/ loss position of the business
  • Evaluate the strengths and weaknesses of the business 
  • use as a reference when building some policies and plans for the business

Mentioned above are the reasons why you must have a balance sheet for your business. Having it proves to be advantageous because it:

  • Makes calculating various ratios easy, which helps in managing the business in a better way 
  • Helps in easy solutions, in case of financial disputes
  • Makes it easy to see the business growth at given times (assists easy comparison)
  • Is a massive resource in case of acquisitions and selling of businesses 

Types of balance sheets

After understanding the importance of having a balance sheet, the next thing you need to know is the types or the classification of the balance sheets. Broadly, there are two types of balance sheets:

1. Classified Balance Sheet: As the name suggests, a classified balance sheet are well-segmented reports. It separates the assets and the liabilities of the company into current and long-term classes. It also provides additional details about the net worth and liquid funds of the business.

Classifed Balance Sheet

2. Non-classified Balance Sheet: A non-classified balance sheet reports the assets and liabilities but does not separate them into various classes. Compared to a classified balance sheet, a non-classified balance sheet is simpler to produce, but over time, it may raise questions from investors or other outside parties about the business’s net worth and liquid funds.

Unclassified Balance Sheet

Various formats of balance sheets

While the main focus of creating a balance sheet is to create a financial document of a business, you have an option to choose a format of your choice! Most commonly used balance sheet formats are:

1. Common Size Balance Sheet: This format is the standard format and hence, the most used format to prepare a balance sheet. This format displays the standard information, along with a column that displays the information as a percentage of the total assets.

Common size Balance Sheet

2. Comparative Balance Sheet: This format presents side-by-side information about the business’s assets, liabilities etc. as of multiple points in time. This format is used to analyze a company’s balance sheet over time to identify changes and trends. 

Comparative Balance Sheet

3. Vertical Balance Sheet: This format is the one where the presentation format is a single column of numbers. This starts with assets line items, followed by liability line items and ends with stakeholders line items. Within each of these categories, line items are arranged in decreasing order.

Vertical Balance Sheet

Commonly used terms in balance sheets

  • Assets: Anything that a business owns is called an asset
  • Non-current assets: Anything that does not belong to the company but is projected to stay with them for a year. Example: machinery, vehicles etc. 
  • Current assets: Anything that is likely to be encashed within a year’s time. Example: inventors, debtors etc.
  • Liabilities: Anything that a business owes to someone is called a liability 
  • Non-current liabilities: Debts that the business has more than one year to repay
  • Current liabilities: Debts that the business has to clear within a year’s time
  • Total current assets: All current assets added together
  • Net assets: Net worth of the business’ assets and liabilities 
  • Total equity: The value of shareholders’ funds

For now, this is it! 

Balance sheets are of immense importance, be it a startup or an established business and building them and managing requires in-depth understanding. The above-mentioned information should be useful to you and make this task, an interesting one!

Also read: How to Get a PAN Card for Your Company