A balance sheet is an accurate description of the financial health of a company on a particular date. A balance sheet is usually created at the end of a year or quarter. The balance sheet summarizes the financial aspects like assets and liabilities. It shows how much money is owed to creditors and how much money do creditors owe to the business.
A typical balance sheet looks like the following:
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Here are the main uses of a Balance Sheet:
Financial Analysis
A balance sheet is used for the complete analysis of the business finances. It is used to understand where the business is headed and how can the problem, areas are rectified.
Applying For a Loan
Every business looking for a loan from a financial institution or a bank has to furnish its balance sheet, in order to be eligible for the loan. This is used by the financial institution to gauge the financial health of the company.
Checking Financial Records
Every business records all transactions in the business, in the books of accounts. These transactions are verified with the help of the Balance Sheet.
What are Assets in A Balance Sheet?
Any resources of value that are owned by a company are called assets. Any land, buildings, equipment, and accounts receivables that are owned by a company are counted as its assets. Assets can be classified into liquid assets and fixed assets.
Assets, that can be converted to cash in the short run are called liquid assets – the once like land and buildings that cannot be converted to cash in the short run are called fixed assets.
What are Liabilities in A Balance Sheet?
Liabilities are what the business has to pay for in the features. These are obligations such as accounts payable and owner’s equity. Liabilities can be classified into short-term and long-term liabilities. Short-term obligations like accounts payable come under short-term liabilities. On the other hand, long-term liabilities are ones that have to be paid for after at least one year. Long-term loans can be categorized under long-term liabilities.
The Working of a Balance Sheet
The following equation depicts the working of a balance sheet:
Assets = Liabilities + Shareholders’ Equity
The balance sheet of a company also gives an overview of the growth and operational efficiency of a business. A good balance of a business having a positive state of finances is an incentive for investors to invest in the business.
