Balance Sheet Definition
A balance sheet is type of financial statements which deals with brief description of financial activities incurred inside company due to assets, liabilities and equity stakeholders.
A balance sheet given to buisness decision makers in the form of accounting report. Balance sheet generally accountants prepared balance sheet during fixed accounting period and then passed through buisness decision makers in form of financial report.
Buisness decision makers takes help from these financial report during taking any decision about company buisness.
What Is a Balance Sheet Definition
Balance sheet is a financial report which provides financial details of company assets, liabilities and equity shareholders prepared in fixed accounting period.
Balance sheet provide well organised statistical data of financial details and helpful in evaluation of capital structure. Balance sheet format included three main entries assets, liabilities and equity.
Balance sheet is a important type of financial statements along with other two financial statements like cash flow statements, and income statements.
 |
| Balance Sheet Formula |
Importance of balance sheet define
There are many important use of balance sheet excel for both small business companies and larger sizes buisness companies.
Balance sheet can be prepared on excel sheet and tabular sheet paper. Accountants generally prepared balance sheet with the of excel. Many online balance sheet template also available which accountants used during creating financial report of any company which later passed through buisness decision makers.
Balance sheet brief look on company financial situation in a fixed period. Balance sheet report tells about what type of assets company owns right and liabilities to pay.
Accountants or any fundamental government authority used balance sheet with combination of other financial statements to find out financial ratios.
Formula of balance sheet
Balance sheet is a type financial statements which is deals with assets on top left corner of balance sheet and liabilities plus equity shares holders in combination with eachother.
To find out what is financial situation of company balance sheet used formula equation.
Assets = Liabilities + Equity of share holder
Above formula of balance sheet tell us company has make balance between assets, liabilities and equity shareholders.
Company has to pay what it's own assets. Here company can adopt options to make payments of what it's owns.
- Borrowing loans taking on liabilities.
- Take money from investors by giving share equity.
Examples of Balance Sheet definition
Let's us take an example to understand balance sheet. Suppose company take loans of $10000 for 10 years from banks of United States.
Now company assets (cash account) will increased at $10000. It's liabilities will also increased at same rate specially long term debt $10000 to balance equation of balance sheet.
If the company takes $20000 money from investors, now company assets increased at same rate by that shareholders equity.
All revenue company generated after subtraction of expenses directly goes into share holder equity account.
Every company consists of many accounts divided company finance account into assets, liabilities and equity shareholders.
These many financial accountants of company may vary widely by industry to industry and depending upon nature of company buisness motive.
In these differences there are some common components of buisness remains same in every company which investors have to come across.
How do you prepare balance sheet
Balance sheet is a financial report which provides us information about how well company financial situation at present time period. Balance sheet don't show us pass trends of that company due this reason it becomes necessary to compare any balance sheet with other company balance sheet working in same field. This will help to make correct conclusion from balance sheet for any company.
Investors can derive number of financial ratios with the help of balance sheet from any company. It helps investors to make decisions on how healthy company financial performance in fixed accounting period.
Two most common financial ratios which investors derive from balance sheet are debt to equity ratio and acid test ratio and many more ratios.
Investors can also use other two financial statements like cash flow statement and income statements. When any doubt created in any one two or both then it will get refer back to balance sheet.
Assets in balance sheet
Assets are located in balance sheet in top left corner. Assets segment, various types of assets accounts are written according to their ability of liquidity from top to bottom. This show the sequence of converting into cash by assets.
In balance sheet assets segment their are two types of assets included i.e. current assets and long term assets.
Current assets can be converted into cash in short period (one year) and long term assets can not converted into cash. Longer term assets also called as non current assets by accountants.
Here sequence of writing assets in balance sheet are given below:-
Current assets in balance sheet
Cash and cash equivalents fast convertible assets. These types of assets can be converted into cash in one year or short duration. These types of assets can be in company in form of treasury bills, hard currency and etc.
Marketable securities include all types of securities which company owns from market. These types of assets can be used at time comes in form of cash.
Inventory are the products of company ready for the sale in the market.
Long term or non current assets in balance sheet definition
Long term assets in balance sheet are non liquidating assets which means these types of assets cannot changed into cash.
Long term investment: means those types of securities which company invested and can not converted into cash by the next year.
Fixed assets: means those types of assets owns by any company which are large in size and requires huge cost intensive. Assets like building, machinery, equipment and durable goods which are high capital intensive.
Intangible assets: means those assets which are no physical presence but they are very important for company to be owned. These types of intangible assets included patients, copy right, intellectual property rights and goodwill.
These types of intangible assets included in balance sheet if company owned such type authority. Any one can find these assets importance by seeing logo of various companies.
Liabilities in balance sheet definition
Short term liabilities
Short term liabilities also known as current term liabilities. Current term liabilities may include liabilities like current portion of long term debts, bank indebtedness, interest rate payable, wages payable, account payable, dividend payable, earned and non earned premium.
Long term liabilities in balance sheet definition
Long term liabilities in balance sheet may include liabilities like long term debts, pension fund liability, deferred tax liability.
Long term debts: means company which gets principal and interest on debts.
Pension fund liability: means those which retired employees and going to retire employees going to get fund from company.
In type of long term liability company kept those funds which it going to pay his employees when they retire.
Deferred tax liability: taxes which are occurred by company and not going to pay next year.
There are many other types of longer term or non current assets can be included in this assets section.
Some left liabilities can be considered outside balance sheet that means those liabilities cannot included in balance sheet.
Limitations of balance sheet
Balance sheet no doubt have lots advantages in analysis of company financial situation in current accounting period in market. In between these good things there some disadvantages of balance sheet as financial statements which should be looked by financial analyst, accountants and buisness decision makers.
Balance sheet is an important financial report prepared by accountants which provides a company snapshot of financial performance during financial year.
But sometimes investors and buisness decision makers makes over prediction and conclusion which is out of balance sheet limitations and this results in wrong decision making about any company.
Balance sheet not provide trend of company performance in past years. It become necessary for investors to compare balance sheet of company with any other companies working in same field of work.