What is a Balance Sheet?

October 27, 2020

One of the documents that you must learn how to develop as a business owner or investor is a balance sheet. This document is also important for individuals who desire to properly manage their personal finances. A balance sheet is a statement of the financial position of a business. This statement includes assets, liabilities and owner’s equity at a given time.

 

The Importance of a Balance Sheet

There are three financial statements that are used to illustrate the financial health of a business. A balance sheet is the most important of the bunch. The other statements are the cash flow statement and the income statement (some refer to this as the profit and loss statement). 

Business stakeholders and analysts assess the performance and financial status of an entity by analyzing its balance sheet. This statement gives a clear picture of a company’s ability to pay for its operating needs. A balance sheet also gives a company insight into what strategies should be taken to use credit in a way that is compatible with the company’s position.

Some balance sheets also feature information from previous periods. This enables business operators and other analysts to analyze trends and make valuable comparisons. Business operators can easily get a picture of their company’s performance. By assessing your balance sheet, you will be able to see where your company needs to improve.

 

What’s Included on a Balance Sheet?

What is included on a balance sheet will be different depending on the industry in which your company operates. Generally, there are three different sections on a balance sheet.

Assets: This section of the balance sheet is usually divided into two sections – liquid assets and non-liquid assets. Liquid assets refer to things such as cash or other assets that can be easily converted to cash. Non-liquid assets refer to assets that are not as easily converted to cash such as land, buildings, and equipment.

Liabilities: Funds owed by a business are referred to as liabilities. This section is divided into current and long-term liabilities. Funds owed that must be cleared in less than a year are referred to as current liabilities while those that go beyond a year are classified as long-term liabilities.

Equity: This is referred to as owners’ equity or shareholders’ equity. This is what is left after liabilities are deducted from assets. You will also see an item on balance sheets titled retained earnings. This refers to company earnings that are not paid out to shareholders in the form of dividends.

 

What is the State of Your Balance Sheet?

If you are a business operator and you cannot easily answer this question, you should address this quickly. Many only have a balance sheet drafted when they are seeking financing; however, a balance sheet is much more important than that. Keep a track of the performance of your business and maintain a balance sheet and the other two important statements.

Rahul Iyer