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Balance sheet refers to a financial statement which reveals the complete financial position of the company for a given date. A company’s balance sheet tells you the details of assets, liabilities and owners’ equity for the business. In simple words, the balance sheet is a statement which tells you the assets of the business, the money others need to pay you and the debt you owe others including the owner’s equity.
Balance sheet is one of the important financial statement used for making business decisions. Balance sheet is used by various stakeholders like management, employees, investors, creditors, banks, regulatory authorities, tax authorities etc.
A balance sheet is also called as a top financial statement. Let’ us understand this by knowing the purpose and objective of the balance sheet. The following are some of the key objectives of the balance sheet:
Balance sheet components are broadly divided into ‘Assets’ and ‘Liabilities’. Each of this balance sheet components consists of several sub-components. The following are balance sheet items:
As shown in the above balance sheet illustration, assets are broadly classified into fixed assets, investments and current assets. Similarly, liabilities are classified as owner’s capital, long-term debts and current liabilities. Let’s understand these balances sheet items in detail.
Something that an entity has acquired or purchased and owned, regarded as having value and available to meet debts, commitments or legacies. Assets are further broadly classified as:
Assets that are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings, and equipment.
Liabilities are the obligations or Debts payable by the enterprises in the future in the form of money or goods. Liabilities are further broadly classified as:
Money invested in the business to generate income.
Money borrowed from a financial institution or from others to be utilized in business for generating income and managing the day-to-day affairs of the business. Ex: Bank Overdraft, Term Loan.
Current liabilities are debts or obligations payable within a short period of time or one year. Ex: short term debt, trade payables, taxes due, accrued expenses.
Below is the balance sheet format
As illustrated above, on the left side of the balance sheet format, all the assets are shown followed by the sub-components of assets. On the right side of the balance sheet format, liabilities followed with sub-components are displayed.
As shown in the above balance sheet format, the balances of total liabilities and assets owned by the business always match. This implies that the total value of assets always adds up to the total liabilities of the business. The following are balance sheet equations:
Balance sheet preparation involves multiple steps to consolidate the accounting records and preparing various statements.
The following are the steps to prepare a balance sheet:
Today, most businesses have automated balance sheet preparation using accounting software. Businesses believe using accounting software helps in saving time and efforts involved in managing books and preparing financial statements such as balance sheet. Further, the use of accounting software facilitates in generating comparative balance sheet – across periods and branches and consolidated balance sheet of all the branches or business verticals.
Watch Video on How to View and Analyse Balance Sheet in TallyPrime