A balance sheet is a snapshot of a company’s financial health, offering a temperature gauge one reporting period at a time. It reports what a business owns (assets) and what it owes (liabilities and shareholders’ equity). It’s an essential tool used by investors, lenders and analysts to evaluate a company. A balance sheet also serves as the foundation for more detailed analysis using other important financial statements such as an income statement and a cash flow statement.
A company’s assets are divided into two main categories – current and fixed. The former are those assets that can be converted into cash within a year, such as short-term deposits, marketable securities and stock. The latter are those that can’t be easily converted into cash, such as buildings, machinery and equipment. In addition, a company’s assets are further broken down into intangible and tangible assets. Intangible assets include patents and trademarks, while tangible assets are the physical items a company uses to operate its business.
Liabilities are the financial obligations a company has to outside parties. These can be short-term or long-term. Short-term liabilities are those due to be paid in the next 12 months, including accounts payable and accrued expenses. Long-term liabilities are debts due in several years, such as loans and bonds. In addition, a company’s liabilities can also include the outstanding balance of its depreciation allowance and accumulated amortization expense.
Lastly, the shareholder’s equity section of a balance sheet reports the initial investment made into a company and any retained earnings. This can be further broken down into common and preferred stock, if applicable. The sum of all these components must equal a company’s total assets.
The most obvious limitation of a balance sheet is that it’s a static document that shows only a snapshot in time. The more dynamic information found in an income statement and a cash flow statement can provide a more complete picture of a company’s performance over time.
In addition, a balance sheet can be affected by accounting decisions that may change the reported numbers. For example, a company’s accountant might decide to use different methods of depreciation and inventories that could impact the amounts posted on the balance sheet. Similarly, a company’s managers might make estimates that could affect the value of certain assets such as accounts receivable and intangible assets.
The most valuable asset a company can have is its people and its reputation. A well-trained, hardworking workforce and a quality brand can help you stand out from the competition. Whether you’re starting a new business or running an established one, it’s important to understand how to leverage these resources to achieve your goals. A BlueVine Business Checking Account can support your business’s success by helping you manage your cash flow. Click here to learn more. Bilanz Hattingen