What Is the Concept Of a Balance Sheet?

Balance Sheet

A Balance sheet is a concept of representing assets and liabilities on the different sides in the format of a financial statement. It is a part of a financial accounting by which accountant shows the real financial position of the company to the shareholders such as through assets, investment, intangible assets, and other assets (left side of the balance sheet), current liabilities, long-term liabilities, and shareholders equity (right side of the balance sheet).

Based on the statement of the balance sheet, shareholders start to calculate their next year’s accounting budget with needed resources and estimate how much revenue they should get. By comparing the balance sheet of previous years, owners get to know how much business has been improved because it represent the clarity of the resources that owners have, what they have to pay, and how much shares they have for future investment. A Balance sheet illustrates the final ending so that owners can start their new beginning with new or existing resources.

Who Makes The Balance Sheet Under Financial Accounting?

A Company’s accountant prepares the balance sheet after summarizing the profit and loss account, trading account, income, and expense account so that they can highlight all the existing assets and left liabilities. Accountants need to examine all the reporting dates and periods with outgoing assets and ongoing liabilities and evaluating the shareholder’s equity.

Accountants know how to deal with all the other financial statements to prepare a balance sheet, it is the head of all financial statements accounting which tells the accurate position of the company during the whole year.

Accountants have qualified with the certification of a certified public accountant (CPA) who has learned all the basic and advanced things that happen in accounting and how to deal with them.

An Accountant is the only one who removes the unnecessary entries and solves the duplicate errors that arise in the financial statements so that they can get accurate results at the end of the financial year.

Accountants interact with the bookkeeper for checking out all the records such as ledger, journal entries, billings and invoices transactions, basic sales and purchase transactions so that they can reach the end and start a new financial year based on calculating previous year assets and liabilities and equity shares. Both are responsible for making accounting books but the accountant is highly responsible for the balance sheet because it is the most critical and crucial financial statement which produces a new beginning by showing the internal and external affairs of the company.

Who Analyzes The Balance Sheet To Start a New Financial Year?

As we know, a balance sheet is prepared only after evaluating all the other financial statements such as profit and loss statement, Income and Expenditure account, cash flow statement so that analysts get a final optimization from a single place. 

It is the snapshot of the company which shows that how the company is performing with the available resources and how much they are expecting from outsiders to intermediate future 

A Balance sheet is reported by the accountant but analyzed by the company’s main management. Management includes shareholders, internal and external investors, owners, founders, financial advisors, and regulators who have been involved in constructing a company structure. These analysts have a different role in different activities at a specific time such as:

Investors 

Investors are those who invest in the company. It is of two types – internal and external.

Internal are those who provide money as an investment in the form of shares or money. 

External are those who offer money to the company for investment purposes in the form of debt in exchange for any security as collateral. Such investors are banks or other financial institutions.

On the other hand, external investors are also those who provide money to the other company for an investment purpose and get paid for that monthly, quarterly, or annually. They have no right to be involved in the company’s decisions and actions on investment.

After optimizing the balance sheet, the investors take action regarding future investment in the right place so that they can get improvement. Financial advisor checks the balance sheet for optimizing whether they should invest in this company or not. If the company’s health is good, they are ready to invest quickly and if the company’s financial position isn’t good, they deny them to provide capital. And investors who offer money as a loan, check the financial position of the company and other financial records.

Shareholders

Shareholders are the holders of shares of the company by investing some amount of capital in the form of shares and get a position of a shareholder in the company. They have a right to involve all business activities and decisions regarding business with the management.

After optimizing the balance sheet, shareholders decide to invest their shares for the future such as how many shares are needed to invest in the company and decide their profits.

Financial advisors

Financial advisors are the advisors of the company who may be insiders or outsiders. 

Insider advisors offer advice only to their own company, not to the other organization but outsider advisors offer advice to anyone by optimizing their sheet and other financial statements.

Financial advisor checks the balance sheet for optimizing the current situation of business so that they can advise for future investment based on this statement.

Items Are Included To Prepare a Balance Sheet

As we all know, the balance sheet contains two sides, ie. assets, and liabilities. The assets are recorded on the right of the balance sheet and liabilities are recorded on the left side of the balance sheet. Both have different motives to represent their items for showing the financial health of the company.

Assets side

The assets column includes current assets, investments, fixed assets, intangible assets, and other assets. 

Current assets

This includes cash and cash equivalents, short-term investments, accounts receivable, other receivables, inventory, supplies, prepaid expenses, inventories. These items calculate the total current assets.

Investment

This includes real estate property (investment), bonds, stock, These items produce investment for future profit.

Fixed assets

This includes land, machinery, furniture, vehicles, buildings, equipment. These items calculate the total fixed assets after subtracting accumulated depreciation.

Intangible assets

This includes goodwill, patents, and other intangible assets. These assets calculate the total intangible assets.

Other assets

This includes bond issuance costs, deferred tax assets, prepaid expenses. These items calculate the other assets.

Liabilities side

The liabilities column includes current liabilities, long-term liabilities, total liabilities.

Current liabilities

This includes short-term loans payable, current portion of long-term debt, accounts payable, accrued compensation and benefits, income taxes payable, interest payables, other accrued liabilities, deferred revenue. These liabilities calculate the total current liabilities.

Long-term Liabilities

This includes notes payable, bonds payable, deferred income taxes. These items calculate the total long-term liabilities.

Shareholders equity side on the left side of the balance sheet 

Shareholders include share capital, common stock, retained earnings, accumulated other income after subtracting treasury stock. These items calculate the total stockholder’s equity. 

Why Does The Balance Sheet Need To Be Prepared?

As we know Company’s balance sheet represents the whole year’s performance of the company as well as the financial health of the company. There are other financial statements which show the business health such as cash flow statement, income, and expense statement but they do not illustrate the accurate results so that analyst can understand the position of the business. 

After analyzing the balance sheet, this analyst decides to organize a meeting to discuss the future action such as how much invest, how much assets to be needed, how much pay for operating needs, and how to meet the other requirements that reach the business in the top. It always summarizes the one-year balance sheet with other year balance sheets for knowing the improvement in the business and identify ways to build up your finance operations. This statement helps the owners to take out the performance chart for the future by analyzing concerns with financial advisors and consultants who find out the profit way to get better revenue in the next financial year.

It is required for calculating the net worth of a business so that owners can think about their future additional debt or equity financing, and planning to sell the business for getting good capital with profit after deducting all the expenses and liabilities.

To get authorities, owners need to prepare a balance sheet for showing in front of regulators and other shareholders.

In sole proprietorship, the balance sheet is unnecessary, it depends on the business partner they want to prepare by accountants or not. In the United States, the balance sheet is prepared only in incorporated businesses.

What kind of Modern Technology Is Used To Prepare a Balance Sheet?

Most of the company uses modern technology to prepare balance sheets such as accounting software so that they can save time, effort, and ignore errors. Choose any one accounting software for their accounting activities such as billings, expenses, sales, and purchase transactions, access bank transactions, track inventory, track expenses, so that at the end, software design a balance sheet according to saved information in data. Now we can say that a balance sheet can be prepared by accounting software because the software automatically fetches all the information regarding the accounting system at the end of the financial year.

How to Prepare a Balance Sheet In Accounting?

For constructing a balance sheet, bookkeepers need to construct accounting books which include journal books, ledger accounts, trial balance, and these accounting books send to the accountants so that can make profit and loss statement, income and expenditure statement, revenue account by reading and comparing all the accounting book made by the bookkeeper. And after analyzing all the accounting books and accounting statements, they prepare a balance sheet with proper format by adjusting the adjustments of assets, liabilities, and equity shareholders.

Journal Ledger Books

Ledger books and Trial balance is mainly prepared by bookkeepers. All the transactions related to business activities are recorded in the journal ledger as journal entries. After that, these entries take out the form as an entry in a trial balance for the ending of ledger accounts.

Trial balance

Trial balance is prepared for clearing the thoughts that might strike in the auditor’s mind, balance all the ledger books to maintain in the trial balance so that trial balance shows the clear picture of accounting structure to make a relevant company’s balance sheet to the accountants. 

Income, expense, and revenue account

All the transactions of assets and liabilities, revenue and expense, profits and losses. Then transfer all the transactions of business except entries under equity, assets, liabilities in the income and expense statements, And the other left accounts are used to create a balance sheet, as we know. (Assets= liabilities + shareholder’s fund).

The Balance sheet at the end

After doing the above procedure, accountants need to prepare a balance sheet by examining and matching all the business transactions so that company analysts can understand the financial position of the company.

Importance Of Balance Sheet

  • Record final assets (company owns), liabilities (what company owes), and equity shareholders funds (company shares).
  • To get the final financial outcome or results at the end of the year.
  • The Balance sheet acts as a health information provider for the company so that they can build plans for the new financial year.
  • It provides both positive and negative results.
  • By using accounting tools, the balance sheet describes the financial status of the company in a proper format.
  • It notifies the increased percentage of a company’s growth by comparing financial statements with the previous year’s financial statements.
  • Analysts can find out the improvement, growth, and things which should be increased.
  • After analyzing the sheet, owners can make business plans. 
  • It shows the equal balance of assets and liabilities along with equity shareholders (Assets = Liabilities + shareholder’s funds).

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