The balance sheet summarizes financial information about your company at a point in time. For example, the statement “as of June 30, 2011” indicates that the statement shows the financial status on that date. This summary of the company’s financial activities reflects the relationship between its assets and liabilities. As such, it gives the investor an idea of what he owns and owes. Assets and liabilities on the statement must balance, hence the term "balance sheet."
A statement of your company’s financial position, the balance sheet itemizes the fundamental accounting equation: assets equal capital plus liabilities. It displays assets at the right side or the top while displaying liabilities and capital together under different heads on the bottom or far right. Balance sheet preparers typically list assets and liabilities according to their respective liquidities or maturities. Hence, they list fixed and noncurrent assets first and cash on hand or bank balance later. Similarly, long-term liabilities display first followed by short-term debts. Owner’s equity or capital comprises share capital, retained profits from the previous year and reserves. It follows the liabilities section.
Balance sheets provide useful information for stakeholders including investors, employees, suppliers and customers. For example, managers use the balance sheet to determine if the business is in a position to expand, or if they should take steps to bolster reserves. Investors use the balance sheet to determine the feasibility for additional investments, and banks review your balance sheet to determine if you can repay a loan. Recent balance sheets outline your expenditures and profits, and government agencies such as the Internal Revenue Service also may want to see your balance sheet because it can help determine the taxes you owe.
Preparation of a balance sheet requires input from sound and efficient management and financial accounting systems so that you can collect, aggregate and draw accurate financial figures from the entire organization. The management, accounting and internal control systems all play a vital part in stemming out financial figures that are reliable, accurate and complete. Use the balance sheet in congruence with the Cash Flow Statement and the Income Statement for a complete picture of your organization. Together, these three financial statements analyze your company's profitability and cash flow.
As the purpose of the balance sheet is to show complete and fair presentation of financial data, you should complement the numerical presentation of your data with notes and further disclosures in the form of working, reasoning and management explanations. It may be difficult for stakeholders to deduce the complete paradigm of the balances you show on your balance sheet without accompanying notes. For example, if your balance sheet notes fail to show the composition of investments, it may be difficult for an investor to ascertain all the risks that your organization is facing.
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