A business is considered reputable when it has the best financial reporting system. A financial report is the key feature that makes the growth of a business faster. Having all the details of the revenue and expenditure makes you know where to allocate expenses and from where you can get benefits. Here in this blog, we have discussed the balance sheet report, its advantages, why you should use it, and how it helps you grow your business.
What is a Balance Sheet Report?
A balance sheet report of a company shows the current condition of the organization. A quick review of the business in what condition a business is at a specific moment directly gives you the visualization of the company’s financial health. A balance sheet report shows a business’s equity, assets and liabilities, which provides a company overview that the company is in debt or exceeding its growth. Whether the company has sufficient assets or not is the information you can have from the balance sheet report.
What are the Key Elements of a Balance Sheet?
The key elements of a balance sheet include three main components: assets, liabilities, and equity; these are the fundamental units of the balance sheet, which help to build balance sheet accounts. These components are given below and explained briefly.
Assets
- What it is: Assets are the resources that are saved for the company so that in the future, the company can take advantage of those assets.
- Example: It includes machinery, property, equipment, cash, etc.
- Parts: Assets have two parts: current assets and non-current assets. Current assets are those assets that can provide you with instant benefit, like cash or machinery, and non-current assets are those assets that can give you benefit but after a period of time, like intellectual property.
Liability
- What it is: Liabilities are the debts that the company owes to pay, whether it is for contractors, other payments or wages of the workers.
- Example: Loan or taxes that are pending.
- Parts: Current liabilities and non-current liabilities are two parts of the liabilities. Current liabilities are those payments or taxes which have to be paid within a year, and non-current liabilities are those liabilities that can be paid after a year. It is not necessary to be paid within a year.
Equity
- What it is: Equity is the overall profit of the owner after all the liabilities have been paid. It shows the net worth of the company.
- Example: It consists of common stocks as well as retained earnings.
- Calculated: It is calculated by deducting all the liabilities from the total assets, then the outcome is shareholders’ equity.
What are the Advantages and Disadvantages of the Balance Sheet Report?
There are many advantages and disadvantages of using a balance sheet report, some of them are given below:
Advantages of Using the Balance Sheet Report
- Overview: A balance sheet report gives detailed information about a business’s financial health at a specific time. With the help of which you can improve your mistakes where you have seen a loss.
- Performance provider: The balance sheet helps evaluate the company’s financial stability by showing whether it has enough assets to cover its liabilities and support growth.
- Risk assessment: The balance sheet provides the upcoming risks that can harm the financial health.
- Improves decision-making: After knowing the impact of the balance sheet over multiple periods, you will get to know the difference by comparing them. Then you can make different strategies so that you do not face a loss.
- Summarize financial records: With the help of the balance sheet report, you will get the summary of financial records including the income statement and cash flow statement.
Disadvantages of Using The Balance Sheet Report
- Static report: The major disadvantage of using a balance sheet report is that it does not give a report of the overall time period; it reports on that particular moment.
- Future performance: You can not predict the future performance of the company on the basis of the current moment report, as it could fluctuate over a period.
- Does not show true value of assets: The balance sheet report does not include the depreciated value of the assets, because you can not know the actual value it. You can only get the estimated value of your assets.
- Lack of cash flow information: Balance sheet report lacks of cash flow statement because it only shows assets and liability values of the business.
How to Create a Balance Sheet Report ?
There are some steps provided, following which you can create a balance sheet report effectively.
- Gather all the financial data: Gather all the data of the business how much accounts receivable and payable, bank statements, etc.
- Calculate your assets: Categorize your assets into current and non-current. Then calculate the total of each category to get your total assets.
- Calculate liability: Collect all data about pending owes, calculate total liability by adding current and non-current liabilities.
- Calculate equity: Calculate the sum of all components of equity so that the balance sheet gets the data of the owners’ equity.
- Verify the balance sheet: In the balance sheet accounts, there is a fundamental formula that you can use to see the accuracy of your report. You have to add liabilities and equity, it should be equal to assets if the two sides do not balance. Then there is definitely an error in your calculation.
- Format: Present your data in a formal format, it should not look clumsy.
Conclusion
After reading this article, you will get to know that making a balance sheet report is an important part of the company’s financial health. A balance sheet report provides the status of the current financial condition of the company at a particular time. Using the balance sheet, you can know the total assets, liabilities, and equity of the company.