A balance sheet is a snapshot of a company’s financial health at a specific moment in time. It lists all the assets (money, inventory, property and investments) as well as the debts and owner equity that a business owes or owns. It can also be viewed as the accounting equation: Total assets equals total liabilities plus owner’s equity.
A business uses a balance sheet to determine if it has enough cash or other valuable assets to cover its short-term financial obligations. It can also be used to compare a company’s performance with competitors or industry averages.
The most common format for a balance sheet has a column on the left that lists all the assets, followed by a column on the right listing all the liabilities and owners’ equity. Most assets are grouped into current and noncurrent categories and arranged by their respective types of value. The owner’s equity section usually includes the book value of the company’s shares and any other capital investments made by shareholders.
Creating a Balance Sheet
The first step in creating a balance sheet is to identify the time period being reported on. After that, the assets and liabilities are recorded on each line of the report according to their respective values as of the reporting date. The totals for each asset and liability are then compared to each other, with the net worth of the company at the bottom of the report.
Accountants and corporate finance teams are most familiar with preparing balance sheets, but other professionals use the information they contain for things like evaluating potential investment options or analyzing historical trends in company performance. Business owners can also create their own balance sheets using templates that make it easy to add in different accounts and values.
If a business’s assets are greater than its debts and owner’s equity, the company is in a positive financial position. This is a good sign that it can continue to grow or pay off its debts without running out of cash. It’s important to note that a business can be in a positive position even if its assets have decreased in value from the previous period, so it’s a good idea to keep up with regular balance sheet updates.
In addition to evaluating a company’s liquidity, a balance sheet can help an investor evaluate a business’s efficiency and rate of return. Several ratios can be calculated from the information contained in a balance sheet, such as debt-to-equity and working capital.
A company’s most liquid asset is cash, which typically appears on the first line of a balance sheet. Other liquid assets include cash equivalents, which are short-term investments with similar values, and marketable securities. Other assets include inventory, receivables, prepaid expenses and any allowance for doubtful accounts. The most nonliquid assets are fixed assets, which typically include machinery and equipment, building space and any intangibles such as patents or copyrights. This category can also include any accumulated depreciation or amortization. Steuerberater Hattingen