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WHAT IS BALANCE SHEET?

Balance Sheet is the financial statement of a company which includes assets, liabilities, equity capital, total debt, etc. at a point in time. Balance sheet includes assets on one side, and liabilities on the other. The balance sheet is the most important of the three main financial statements used to illustrate the financial health of a business. The other two are the income statement and cash flow statement.

"For the balance sheet to reflect the true picture, both heads (liabilities & assets) should tally (Assets = Liabilities + Equity)."

Balance sheet is more like a snapshot of the financial position of a company at a specified time, usually calculated after every quarter, six months or one year.

BALANCE SHEET HAS THREE MAIN HEADS:

• Assets
• Liabilities
• Capital Or Equity

WHAT ARE ASSETS?

Assets are the heart of a business. This is where you should spend most of your time when doing a balance sheet analysis. Anything a company owns, tangible or intangible, that can generate revenue in the future, is its asset.

Accounting standards require that a possession be recognised as an asset only if its value can be measured reliably and if it can be sold separately.

In addition to tangible or ‘hard’ assets, like land and machinery, companies own several intangibles that qualify as an asset. These include patents, copyrights, and trademarks. These cannot be touched or felt, but they can generate revenue, be valued reliably, and be sold separately.

Companies record assets as ‘current’ and ‘fixed’ on the balance sheet. Fixed assets include plant & machinery, land, and building etc. All fixed assets, apart from land, lose value over time. This loss in value is called depreciation.

Assets are those resources or things which the company owns. They can be divided into current as well as non-current assets or long term assets. The assets side shows what a company owns, and the liabilities side shows what the company owes. Assets and liabilities are either ‘long-term’ or ‘current’. Long-term assets and liabilities stay with the company for more than a year. Current assets and liabilities normally have a life of less than one year.

It is reported as an expense on the income statement each year. The value at which a fixed asset is recorded on the balance sheet is the differences between its purchase price and the total depreciation charged till the balance sheet date.

The balance sheet generally starts with sources of funds. It shows all the current liabilities of the company, followed by its long-term debt and other long-term liabilities.

For intangible assets, the annual loss in value is called amortization. It is treated identically to depreciation.

WHAT ARE LIABILITIES?

Liabilities on are debts or obligations of a company. It is the amount that the company owes to its creditors. Liabilities can be divided into current liabilities and long term liabilities. All outstanding financial obligations of a company are its liabilities. Long-term liabilities mostly include debt that the company has raised for more than five years. It can be in the form of money borrowed from a bank or funds raised through the sale of bonds (i.e. debentures).

CURRENT LIABILITIES INCLUDE:-

WHAT IS EQUITY?

Another asset source is equity. If you are the sole proprietor of your business, this is referred to as owner’s equity. If your business is a corporation, equity is called stakeholder’s equity. When all liabilities are subtracted from your company’s assets, the result is equity.

Equity is made up of paid-in capital and retained earnings. Paid-in capital is the amount each shareholder initially paid for his or her stock. Retained earnings refers to the amount of money your business didn’t sell to shareholders and instead reinvested into itself. Promoters sell some shares to investors or the general public to raise these funds. These shares are sold at a higher price or a premium on the original. The equity value you see on the balance sheet of a company is based on the original price. It is known as the book value of equity.

Assets = Liability + Capital

WHY ARE BALANCE SHEETS IMPORTANT?

Balance sheets are also important because these documents let banks know if your business qualifies for additional loans or credit. Balance sheets help current and potential investors better understand where their funding will go and what they can expect to receive in the future. Investors appreciate businesses with high cash assets, as this insinuates a company will grow and prosper.

TYPICAL ITEMS USED IN BALANCE SHEETS ARE:-

Balance sheet analysis can reveal a lot of important information about a company’s performance. Importance of balance sheet is listed below:

The balance sheet is the most important source of information about a company’s financial health. This makes reading the balance sheet one of the most important skills you need as an investor.

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