What is a Balance Sheet and How to Use it

In addition to communicating with shareholders, investors, and management, in particular, a balance sheet is one of the most crucial financial papers for any organization to provide insightful information at a specific point in time. A company’s performance and capability to fulfill its financial responsibilities are also included in the balance sheet. Let’s dive into the importance of balance sheets.

What is a balance sheet?

A balance sheet is one of the financial documents that all businesses are required to have to provide their financials’ condition and health. On the balance sheet, there are the organization’s assets, liabilities, and equity. A balance sheet serves the objective of summarizing the corporation’s financial situation at a particular period.

Depending on the demands of the organization, balance sheets are generated periodically during the fiscal year. Therefore, it can provide constantly updated information to people who need it. It’s worth noting that a balance sheet just conveys material as of a certain date. They are a useful and basic tool that may aid in the financial decision-making process for shareholders, creditors, and leadership.

Reading a balance sheet

You may now have the broad picture of a balance sheet, so now we will go into details on how to interpret and examine it.

Firstly, if you look at the top left portion of the balance sheet, you will see the lists of assets and their, assets are listed from most liquid (at top) to least liquid, which enables you to assess your liquidity, or which assets you might immediately convert to cash, if necessary, such as cash equivalents and inventories. Following liquid assets, that is non-liquid assets that must be kept to be sold for their full worth.

Next, the bottom left of the balance sheet includes the liabilities and equity sections. Current liabilities and long-term liabilities will be listed respectively to reflect the liquidity order because non-current liabilities are debt that will be covered in the next few years.

Finally, you may calculate the equity that the existing owners have in the company by adding up their total equity.

The totals for assets, liabilities, and equity are shown at the bottom of each section. Total assets should equal total liabilities plus total equity, thus the given name Balance Sheet. You can make sure the information in your balance sheet is accurate by confirming that these figures match the equation formula.


The takeaway

With the information given, you should now be able to comprehend the elements, functions, and importance of a balance sheet while attempting to determine the financial situation of any company. If you need assistance gathering data for your financial statements and / or interpreting your financial position schedule a free consultation. For more intriguing content, please follow us on IG @_taxkeepingbyac.

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