A balance sheet is a comprehensive report of a company’s financials. Put simply, it illustrates what the company owes as well as what it owns, and represents a general statement of the financial position of the company.
The basic formula
All balance sheets follow the same basic formula: assets = liabilities + equity. This formula represents the fact that what a company owns is the sum of its liabilities (for example: loans, rent, utilities, and other bills) and its equity, meaning the amount contributed by its investors or shareholders. It is imperative that the liabilities and equity be equal to the assets, so that the company’s financial position is comprehensively represented in the balance sheet and nothing is left out of the equation.
In this way, the basic formula is an indicator of the company’s financial health and is useful for keeping the company’s spending in check and understanding how spending contributes to the company’s assets.
A balance sheet is ideally updated on a yearly basis, and who takes charge of it depends on the size of the company and whether it is publicly or privately owned. A small, private business will usually have its books kept by one of the owners or it will hire a bookkeeper, while a public company will have to reach out to a registered accountant as its financial records will be subject to much closer scrutiny and will have to answer to specific government regulations.
In order to get a sense of how the company is performing financially, it is not sufficient to look at a single balance sheet in isolation as this fails to indicate meaningful insights about the progress of the company or its long-term trends. The evaluation of the company’s financial position is performed by comparing the current balance sheet with ones from previous years, and it can also be useful to compare a company’s balance sheets with those of other businesses in the same industry to be aware of the diversity of approaches and to feel out the competition.
Although a balance sheet is useful in many ways, it falls short in that it is a static representation of the company’s financial situation over a limited period of time. This is why a company’s books are kept in three different types of financial statements: the balance sheet, the income statement, and the cash flow statement. Looking at all three of these statements will provide a better understanding of the company’s current financial standing and an idea of what it needs to work on in the future.
Welink Accountants offers business owners a list of qualified accountant experts in their field, who have the experience and ability to create and manage balance sheets as well as the other financial statements the company needs to evaluate its financial situation on a yearly basis and to keep its books in an efficient manner.
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