Must Knows

All about the balance sheet

[] In this article, we talk in detail about balance sheet, its format and the various sections and subsections it has

What is a balance sheet?

One of the reports that comprise a financial statement is known as the balance sheet. Its purpose is to present the position of the company’s finances as of a certain date. The balance sheet of an organisation contains a huge amount of information that can be used to examine the entity’s economic independence as well as the effectiveness of its business.

You are reading: All about the balance sheet

The balance sheet equation states that the entire amount of a company’s assets must always be equal to the total amount of a company’s liabilities plus the total amount of shareholder’s capital. 

Assets = Liability + Capital

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In most cases, investors and shareholders will look at a company’s balance sheet in order to determine the worth of its holdings and estimate how well an organisation can make use of its assets. The following are the three most crucial parts of any balance sheet:

  • Asset 

A resource that is held by an organisation and used to generate a positive economic value is referred to as an asset.

  • Liability 

A liability is a list of obligations that an organisation owes to other individuals or organisations.

  • Capital 

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Capital, often known as equity, refers to the total amount of money contributed by shareholders.

Balance sheet: Significance

An examination of a company’s balance sheet may disclose a great deal of useful information on the profitability of the business. The following are reasons why the balance sheet is so significant:

  • Venture capitalists, creditors, and other players use it to gauge the financial position of a company.
  • It is a method for determining the progress that has been made by an organisation. One method for doing this is by contrasting the balance sheets of several years.
  • If you want to get funding for your company from the bank or investors, you will need to provide them with this important paperwork.
  • It enables participants to have a better understanding of the institution’s financial performance as well as its liquidity status.
  • It makes it possible to make decisions on future expansion and to cover unanticipated costs.
  • By evaluating the balance sheet, one is able to determine if the organisation is using its profits or its debt to support its activities.

Balance sheet format

There are a few different forms of balance sheets that may be used, and in general, they are grouped together as vertical, comparable, categorised, and consolidated balance sheets. The traditional layout of the balance sheet, sometimes known as the T-shaped or horizontal format, is as follows:

Name of the Company
Balance Sheet
Until the End of the Period
Obligation Value in rupees Value in rupees Resources Value in rupees Value in rupees
Capital And Stockpiles Fixed Resources
Starting Capital Balance XXX Area XXX
Storage and Surplus XXX Subtract: Depreciation XXX XXX
Subtract: Drawings XXX
Capital Balance XXX Structure XXX
Subtract: Depreciation XXX XXX
Guaranteed Loans
Long term debt XXX Holdings
Other long term liabilities XXX Planning for the Long Term XXX
Unguaranteed Loans Current Assets, Deposits, and Borrowing
Credit payable in cash XXX Stock XXX
Currency and money equivalents XXX
Current Obligations Other liquid funds
Trade Accruals XXX
Compounded Interest XXX Prepaid expenditures XXX
Other Current Obligations XXX Supplement-ary expenses XXX
Total Obligations XXX Total Resources XXX

Balance sheet: Extensive explanation of sections and subsections 

Section Sub-Section Summary 
Liquid Asset Cash Assets that are considered current are ones that can be converted into cash in a concise amount of time. In terms of liquid assets, cash refers to any resources held in a bank’s current, savings, or money market accounts.
Accounts Receivable The amount of money that has to be collected from clients, who are sometimes referred to as debtors, is known as accounts receivable. From the moment the client is invoiced until the moment the firm gets payment, the company produces these receivables.
Inventory All the products that a business acquires and subsequently resells are considered inventory. Inventories cover the period from when products or raw materials are acquired or processed until they are sold to the consumer.
Capital Asset Equipment The phrase “fixed asset” refers to anything that the corporation has and will continue to hold for an extended period of time. Long-term assets are often subject to depreciation over the course of time; hence, when recording these assets, a total cumulative amount of depreciation is removed from the value of the asset.
Vehicle Depreciation is applied to long-term assets, such as vehicles that are kept for longer than a year.
Land As a long-term investment, the land holds its value better than any other kind of property. Long-term assets rise in value over time. When it comes to long-term assets, this is one that doesn’t depreciate, but rather rise in value over time.
Non-Physical Asset Goodwill A company’s goodwill is considered an intangible asset since it does not consist of any physical assets but nonetheless contributes to the value of the business.
Current Obligation Accounts payable It’s important to keep track of responsibilities that could become payable in the near future, such as those owed to suppliers and retailers. If you owe money to someone but haven’t received payment, you have an account payable.
Accrued expenses Earnings, interest, and other accrued costs are all examples of accrued expenses.
Taxes payable This is the amount of money owed to the government by a business in the form of taxes. Considering that all taxes must be paid within the next year, they are categorised as current liabilities.
Long Term Obligation Long term debt A long-term debt is a debt that will not be paid in the current year but will be fulfilled at some point in the future. Amounts owed to 3rd parties and lenders for more than a year are included in this figure.
Equity of Stockholders equity Capital stock To calculate capital, you subtract all of the company’s assets from the company’s liabilities. As an example, although corporations record stockholders’ equity as ordinary or preferred stock, a partnership’s equity is simply the sum of each partner’s individual contributions.
Retained earnings Excess profits are held back by a firm to invest in its operations. This is the amount of money that has not been paid out to the shareholders. Ploughing earnings back into the company is another name for this practice, as is known.

Is it necessary for each business to prepare a balance sheet?

In accordance with the modification made in 2017 to the Companies Act of 2013, each business is now required to compile their profit and loss account as well as their balance sheet in accordance with the format that is stipulated in the new Schedule III.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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