The balance sheet, also known as the statement of financial position, is among the most common financial statements utilized by business owners and accountants. A balance sheet represents a company's financial position at the end of a business cycle. For instance, amounts stated on a balance sheet dated October 12, 2016, indicate the recorded transactions through October 12. The indicated date portrays the financial position of a company at that moment, thus allowing the reader to see the company’s assets and liabilities. This essay proves that the balance sheet is important in any company organization, since the information presented therein is useful to interested parties such as labor unions, government agencies, competitors, customers, suppliers, company management, potential investors, current investors, and creditors who want to assess the financial position of the firm.

What is a Balance Sheet?

A balance sheet is a financial statement of an organization. The statement declares a company’s position financially at the end of a trading period. The reported statement illustrates the value of company shareholders’ equity, liabilities, and assets of a company's financial situation. The balance sheet is assembled with the help of briefing information extracted from ledger accounts. Therefore, it gives a summarized financial picture of the organization’s status. The balance sheet outlines the assets owned by the company versus their balancing obligations. Obligations take form of current liabilities, long-term loans, capital employed, and shareholders, whereas assets are information about both current and fixed assets. Current assets include cash, debtors, and stocks, and fixed assets involve buildings and equipment. Liabilities can mean cash owed to suppliers of raw materials and components, and the bank.

The Importance of Balance Sheet for a Company

A balance sheet aids in realizing the financial capabilities and strength of a corporation. For instance, it helps in ascertaining whether the company is in a position to expand, take quick steps to bolster cash reserves, and efficiently handle general financial subsidies, expenses, and revenue flows. The company should always try to keep their asset balance higher than their liability through having a positive shareholder’s equity. Therefore, through this information a company analyzes their income trends and worth. The balance sheet is essential for a company's strategic financial planning.

It is evident that a balance sheet is important because it informs owners of a business on the financial position of their firm. In most cases, business owners lack understanding of the performance of their organizations because they seldom look at balance sheets. When liabilities are equals to assets, the business is at risk of bankruptcy. Balance sheets are also important for external stakeholders interested in the financial health of the company.

How a Balance Sheet Works

It is essential for company shareholders to understand how to read and analyze the structure of a balance sheet. The balance sheet consists of two parts. Parts of the equation must balance or equal each other.A balance sheet states that Equity/ Shareholders +Liabilities =Assets in equation form. Assets represent what an organization utilizes to operate its business, whereas the company’s equity and liabilities support these assets. In a publicly traded company, stockholders equity is the cash invested initially into business combined with retained earnings to represent the source of funding for an enterprise. A balance sheet gives a financial picture of a corporation in given time.

The Type of Information Found On the Balance Sheet

A balance sheet consists of information on assets, liabilities, and equity. In assets category, it consists of intangible assets, property, fixed/long term assets, and other. Current assets are organization’s owned resources expected to benefit the company in future. To simplify the balance sheet, assets are collectively categorized by totals presented and similar characteristics. Company’s assets include buildings, land, inventory to be traded, receivables from customers, and cash. Fixed/long-term assets are held for more than a financial year of a company. Usually, long-term assets are invested in debt instruments otherwise referred to as hold to maturity securities. They include debt securities, other company’s stock instruments available for sale for investments, and government bonds. In the property section, listed assets are tangible and long-term assets used in business operation. These long-term assets include land, office and factory equipment, computers, and buildings. Since land has unlimited lifespan it is listed first. The remaining assets such as equipment and buildings are listed in book value. In the category of intangible assets, the company’s legally protected long-term assets are listed, though intellectual property protections are elusive by nature. These intangible assets include trademarks, copyrights, and patents, which have legally specified expiry period, but some can be renewed. Other assets are the final section that requires disclosure of different assets that do not fit in the given categories. A deferred charge and prepaid amount is built on recognized accounting principles and is beneficial to the organization.

The classification of liabilities includes long-term debt and current liabilities. Long-lived debts are those that are due for at least a year. They include long-term notes, mortgages, and bonds payable with exact maturity date. Overdue income taxes payable falls in this classification. Deferred income taxes payable arises when applied accounting rules differ from rules applied to income tax returns. The tax rules allow deferred income taxes to be deducted from the return income tax before being stated as an expense on the statement of operations. In future, when the timing differences reverse the deferred income taxes, payable type is omitted after a payment is made to tax authorities.

Current liabilities are debts due in the span of one year. Usually, these debts require payments in cash to a different entity. Besides, the term payable is added to current liabilities. Accounts payable include outstanding amounts to suppliers by an organization that purchases on a credit basis. Interest payable is the accumulated interest on other interest-bearing payables/notes payable of a company’s last payment. Other current liabilities include the current year's portion of long-term debt due within a year in the balance sheet, taxes payable, and estimated warranty payments.

As a category, owners’ equity is the last section of the balance sheet. It is also referred to as shareholders' equity and it entails various subdivisions such as retained earnings, adjustments for change in the value of certain investments in equity of other organizations, and paid-in capital. Retained earnings are the amount representing any earnings from beginning of the company that is distributed to shareholders as dividends. The adjustments for market value changes in available-for-sale investments in another business segment are presented as a component of owners’ equity. The adjustments are conveyed in comprehensive income, because they reflect changes in owner’s equity different from the net income. Short-term investments, such as trading securities value, are comprised in the calculation of net income. However, the value of available-for-sale securities changes is described only in the statement of comprehensive income and owner’s equity. Paid-in capital reveals the investment shareholder-owners made in the company. They include common stock equity and preferred stock equity as the figure paid to the company by shareholders for diverse equity instruments issued by companies. The acknowledged accounting principles require paid-in capital amount paid more than the par value and the par value of the stock.

An organization that uses balance sheets every financial year is in a position to analyze its strengths and weaknesses. A balance sheet summarizes a company's existing assets and liabilities. A balance sheet is important to an organization as it helps in realizing how much a company owes to creditors. Besides, a company has an estimation of the cash available. The company's financial strategic planning is possible with the application of a balance sheet. The balance sheet works in a manner that ensures balanced company operations, considering the company's financial obligations, with the available equity investment.

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