What Is a Balance Sheet?
A balance sheet is essentially a financial statement that lists and reports a company’s assets, liabilities, and shareholder equity at a specific moment in time. Essentially, this statement is vital to understanding what a company owns and owes and how much has been invested by shareholders.
A balance sheet is produced to reflect a specific moment in time, and the data is used to understand investors’ rate of return and evaluate a business’s capital structure. Balance sheets can also be used alongside other types of financial statements to perform analysis and calculate financial ratios. To understand exactly how balance sheets work and how to use them, please read on.
Why Are Balance Sheets Important?
As a business owner, balance sheets are crucial for understanding the health of your company and the relationship between your different accounts. When you scrutinize a balance sheet, it allows you to see the following:
Who Is Responsible for the Balance Sheet?
If you have a bookkeeper or an accountant, this individual will be responsible for producing the balance sheet. However, smaller businesses that do not employ any financial staff typically place the business owner in charge of producing the balance sheet.
It’s worth noting here that you do not have to employ full-time financial staff to have balance sheets produced. You can always employ the services of a virtual bookkeeper or accountant to do it for you. For example, EvolveCFO gives you access to financial professionals for this very reason.
Items on a Balance Sheet
So what exactly is on a balance sheet? Here are the main components that make up the bulk of the document.
Assets are essentially everything the business holds of value that can be converted into cash within a year or less:
The balance sheet also includes long-term assets that cannot be liquidated within a year:
Next we have liabilities. In a nutshell, this is any money the company owes to outside parties, including:
Long-term liabilities include:
Finally, we have equities, and this refers to:
Balancing a Balance Sheet
The clue is in its name. A balance sheet must always be produced balanced. To achieve this, the balance sheet is split into two sections; business assets on one side and liabilities and owner’s equity on the other side.
The two sections must then represent the following formula:
Assets = liabilities + owner’s equity
In other words, the total value of the assets must be the same as the combined value of the liabilities and equity. When this is the case, the balance sheet is considered balanced.
Total assets is the sum of all short-term, long-term, and other assets. Total liabilities is the sum of all short-term, long-term and other liabilities. Total equity is the sum of net income, retained earnings, any capital paid in, and share of stock issued.
Analyzing a Balance Sheet
Balance sheets are typically analyzed through financial ratio analysis. This can take place in one of two ways:
An accountant is qualified and able to use both types of analysis to gain a deeper understanding of your company’s financial health. This means you’re not suddenly expected to understand how financial statements and balance sheets work. You just need to get an accountant on board to do it for you.
However, there’s no need to rush out and try to recruit a financial expert, you can just employ the services of a virtual EvolveCFO accountant here.
At EvolveCFO, we specialize in providing financial support and assistance to new businesses and startups. Our team of qualified accountants is on hand to take care of your day-to-day financials, bookkeeping tasks, and any financial analysis you require to help your business grow.