Table of Contents
A balance sheet offers an instant overview of the financial situation of a business at a specific point in time. It reveals the assets of a company, liabilities and stockholders’ equity, providing valuable information for investors, managers of companies, suppliers, competitors, government agencies and potential lenders. A balance sheet should follow the formula, “Assets = Liabilities + Owner shares”.
In the account form of the balance sheet, the assets appear on the left and the liabilities and stockholders’ equity appear on the right. Following the generally accepted accounting principles, the assets are listed in order of liquidity. In general, cash comes first, followed by current assets-accounts and receivables-and fixed assets, such as land, buildings and equipment. On the right side, current liabilities-accounts and documents payable-are listed first, followed by long-term liabilities, such as the mortgage payable. The shares of the owners, consisting of the initial investment, social capital and retained earnings, follow the liabilities section.
Form of declaration
In the balance sheet report form, assets appear first followed by liabilities and stockholders’ equity. This form follows the liquidity order, listing current assets before fixed assets and current liabilities before long-term liabilities.
A classified balance sheet presents the accounts in different groups or categories. For example, the sheet may classify assets as current long-term investments, property, plant and equipment and intangible assets. Liabilities are classified as current liabilities and long-term debts. The owners’ share section includes the capital invested, the beginning and the current accumulated results. Readers usually find this format very useful.
Common size balance
A common stock balance reaffirms each dollar amount in the balance sheet as a percentage of a common base figure. Divide each asset between the total amount of the assets, each liability between the total obligation amount and each item in the net assets between the total capital amount of the owners. The final totals of each section will be equivalent to 100%. By analyzing this balance, company executives can quickly compare the percentages to the average percentages of the industry. For example, a company with an inventory of 8% of total assets can check whether this percentage compares favourably with industry statistics. The Outsiders (ie, banks, potential investors,
Projected General Balance
The preparation of a projected balance sheet presents challenges, with an inaccurate result. Instead, the forecast of a balance provides a detailed plan of the future of the company in relation to the allocation of resources, financing and operations. With the use of the most recent balance sheet, an accountant or an executive will examine each item and predict the likely effects on the dollar amount. A balance sheet forecast provides investors, lenders and other readers with valuable information about the future direction of the organization. Many questions can be answered, including how the company will finance the projected equipment improvements and face an increase or decrease in sales.