Any Business needs a financial reporting system to make the business reliable and reputable in the current time or the future. Financial reports play a crucial role in a business’s growth. The balance sheet report also play a important role and helps to explain the company’s assets, liabilities, and shareholder equity at a specific point in time. Its the one of the most important documents that help to make a company’s financial statements.
In this article, we understand the balance sheet report and how to create a balance sheet report and its key elements. Walk through this informative guide to enhance your deep knowledge related to the balance sheet report.
What is a Balance Sheet Report?
A balance sheet report demonstrates a company’s financial situation by summarizing its assets, liabilities, and shareholders’ equity at a certain point in time. A balance sheet is a financial statement reflecting the company’s net ownership interest. The balance sheet serves as a basis for calculating ratios that reflect the well-being of a company, for example, liquidity, leverage, and returns on investments.
How Balance Sheet Report Work?
The balance sheet is a financial statement that presents a company’s financial position by listing its resources and obligations at a specific point in time. It is based on a fundamental equation: Assets = Liabilities + Equity. On one hand, assets of the business (such as cash, buildings) are recorded, and on the other hand, liabilities (which the business owes, such as loans) and equity (shareholder’s stake, retained earnings) are shown; the two sides must always be equal, which indicates that assets are financed either through debt or by owner’s investment.
What are the Key Elements of a Balance Sheet Report?
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. The components are listed below and briefly explained.
Assets
- What it is: Company use the assets as a backup in the future or in an emergency case, and having assets gives the company help in company growth also.
- Example: It includes machinery, property, equipment, cash, etc.
- Parts: Basically Assets have two parts first, current assets, and second, one is non-current assets. Current assets provide instant benefit, such as 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 means it’s a debt that the company owes to pay, while its is for contractors, other payments, or wages of the workers.
- Example: The examples of liability include accounts payable, credit card bills, taxes collected, and loan payments that are pending.
- Parts: Current liabilities and non-current liabilities are two parts of the liabilities. Current liabilities are those payments or taxes that 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.
ShareHolder Equity
- What it is: It shows the overall net worth of the company when all the liabilities are paid. Equity shows the overall profit of the owner.
- Example: It includes common stock as well as retained earnings.
- Calculated: It is calculated by deducting all liabilities from total assets, and 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 the Balance Sheet Report
- It represents a company’s exact financial situation as of a particular date by enumerating its assets and liabilities.
- Allows one to gauge the business’s strength by comparing assets to liabilities and equity.
- A balance sheet is a perfect feature for analyzing liquidity since it provides a clean chit to the company’s ability to meet its short-term obligations.
- The balance sheet is an excellent reflection of the company’s overall financial health and shows the extent to which a company relies on debt.
- Thus, it serves as a tool for investors, lenders, and creditors to determine the risk level involved before investing or granting loans.
- Moreover, management can use this tool to develop plans, allocate resources, and decide on action steps.
- It makes it possible to compare the financial condition at various financial accounting periods.
Disadvantages of the Balance Sheet Report
- Indicates the financial position of the business at a particular moment only and does not show the overall business performance.
- In the balance sheet, assets are recorded at their historical cost, and it does not publish the current market value of the assets.
- It does not assess the account of the employee for employee skills, brand reputation, and customer loyalty.
- May be influenced by the accounting policies and estimates used, thus accuracy can be compromised.
- It does not disclose cash flow or profitability; hence, it should not be the sole basis for decision-making.
- There is a chance of window dressing, which means the figures are altered to give a false impression of financial strength.
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: You have to gather all the data related to your business and focus on accounts receivable and payable, bank statements, etc.
- Calculate your Assets: you need to check your assets its belong to current and non-current, then categorize them. After the categorization, you can calculate the total of each category to get your total assets.
- Calculate Liability: Now collect all data who pending and calculate the total liability by adding current and non-current liabilities.
- Calculate Equity: To calculate the owner equity, you need to calculate the sum of all components of equity, so you get the total equity of the owner.
- Verify the Balance Sheet: After calculating the three fundamentals of the balance sheet, the balance sheet report depends on this fundamental formula that you can use to see the accuracy of your report.
- Format: Present your data in a formal format; it should not look clumsy.
Conclusion
In this article, we understand the role of the balance sheet report in the business. Its play a crucial role in making a business reliable and progressive. The balance sheet report totally depends on the fundamental formula in which assets, liability and equity are included. You can easily create a balance sheet report with the help of fundamental formula, follow this informative guide to understand the balance sheet.