Fastidious bookkeeping is a cornerstone of every business. Even if you don't always know every number, your company's balance sheet should always be able to tell you at a glance what money you have and where your money is coming and going from. This guide looks at what a balance sheet is, what it shows, and the advantages of having one.
Balance Sheet Definition
Balance sheets summarize a company's financial balances - this includes shareholder equity and assets and liabilities. It is considered to be one of the fundamental financial statements of any business. Occasionally referred to as a statement of net worth or a statement of financial position, it is one of the most important financial documents, as it gives you an idea of your company's financial health.
Balance sheets are regularly used by several professions - investors, business analysts, accountants, and business executives. Used alongside cash flow and income statements, they allow users to gain oversight over a company's current assets and current liabilities. It allows them, for example, to see whether the company's net worth is positive and whether the company's assets can cover current obligations.
What does a balance sheet show?
Balance sheets vary slightly, depending on the industry and organization you are looking at. However, there are several categories and items in these categories that most balance sheets have in common.
- Accounts receivable: This refers to the sum of all revenue made in sales that have not been paid for as well as the allowances for doubtful debts (= amount owed to a creditor that is unlikely to be paid).
- Cash and equivalents: The first line of your balance sheet is likely to show cash as well as cash equivalents (= assets that can be liquidated at any point or that have short-term maturities).
- Inventory: This refers to any raw materials, products being manufactured, and finished goods.
- Accounts payable: This refers to what your company owes to its suppliers for unpaid purchases.
- Current debt: Any debt due to be paid within a year or operating cycle falls in this category.
- Current portion of long-term debt: Any portion of a debt that has matured for one year due within a year. Can be one category with the above.
- Long-term debt: This refers to the total sum of long-term debt minus the current portion of long-term debt.
- Bonds payable: The amount of bonds issued by a company.
- Retained Earnings: The total net income your business has decided to keep and not pay out in dividens.
- Share capital: The total value of monies shareholders have invested in your business.
Do I Have To Have A Balance Sheet?
While a company is not legally required to have a balance sheet (unless you’re a public company), having one will make it much easier to assess the financial health of your business. If you are feeling uncertain about creating a balance sheet yourself, an accountant will be able to help. There also is plenty of software available that takes can automate the process for you.
Balance Sheet Example
See below for an example of a balance sheet:
For a description of the main elements, see above.
Balance Sheet FAQs
- Why is a balance sheet important?
A balance sheet provides you with valuable insight into your company's financial health. It shows current assets and current liabilities and allows you, for example, to determine whether your company's current net worth is positive.
- Who is required to file a balance sheet?
There is no legal requirement for your business to have a balance sheet unless you are a public company.
- What are the main sections of a balance sheet?
Balance sheets vary slightly across different sectors and types of business, however, there are some main categories they share - current assets, current liabilities, and stakeholders' equity.
- Is depreciation an asset on the balance sheet?
Depreciation can be found on the asset side of the balance sheet - it indicates the decrease in the value of capital assets.