A balance sheet is a snapshot of a company’s assets, liabilities and shareholder equity at a particular point in time. It’s one of the core financial statements that businesses use, along with an income statement and a cash flow statement. A balance sheet offers a snapshot of the worth and health of your business at a specific moment, and can be used in conjunction with other financial statements to conduct fundamental analysis and calculate financial ratios. A balanced sheet also provides a useful comparison tool, as you can see how your business has grown over time by comparing two or more balance sheets.
Assets are recorded in the first section of a balance sheet, and can include everything from raw materials to technology equipment. The most liquid assets are listed as cash and cash equivalents, which are defined as any short-term assets that can be quickly converted to cash, including marketable securities and accounts receivable. The second asset category is the property, plant and equipment account, which includes any capital expenditures your company has made to maintain or improve its physical assets, such as a new factory or a fleet of trucks. This can be a significant portion of your total assets, and it’s important to regularly compare this figure to your annual capital expenditure budget.
Liabilities are the opposite of assets, and include any money that your company owes to outside parties, from debt payments to utility bills. The liabilities section is typically broken down into current and long-term liabilities. Any payment that extends beyond a year is considered a long-term liability, and this would include mortgage payments, interest on corporate bonds and pension obligations. The final category is Shareholders’ Equity, which is equal to total assets minus total liabilities. This can be broken down into subcategories, such as common stock and retained earnings.
While a balance sheet is a valuable tool for companies, it can also have some drawbacks. It’s a static document, meaning that it only reports on the value and health of your company at a particular point in time. For this reason, many analysts use a combination of the more dynamic income statement and cash flow statement to paint a fuller picture of your business’s performance.
A balance sheet can also be misleading if it’s not prepared correctly. For example, the intangible assets section of a balance sheet can be inflated or understated by overestimating the value of trademarks and patents. Using a balance sheet in conjunction with other financial statements can help ensure that your company is reporting accurate information and following good accounting practices. This will give you a better understanding of your company’s financial health, and allow you to make informed decisions when it comes to raising capital or expanding your operations. Bilanz Hattingen