What is the Meaning of a Provisional Balance Sheet?
Financial statements provide companies and their owners, lenders and investors with a variety of accounting and financial information that provides insight into how a company is performing. Balance sheets provide a snapshot of a company's performance at a specific point in time. Provisional balance sheets, often used to describe an unaudited balance sheet for companies that are audited, provide an interim snapshot that may be modified.
Provisional means that something is conditional or interim or subject to change or alteration. Provisional also means that something serves a purpose for the time being. Therefore, a provisional balance sheet is one that is subject to change. A balance sheet may be provisional because a company is awaiting a final appraisal on property or equipment it owns. Alternatively, a balance sheet may be provisional due to pending adjustments to the net income statement that will impact retained earnings.
Companies prepare the balance sheet at the end of an accounting period. Once a CPA firm completes an audit of a company's financial statements, including the balance sheet, those financial statements become the actual. The balance sheet the company prepared is therefore referred to as the provisional, or interim, balance sheet, since the audit process may result in adjustments to that statement. Basically, in this case the provisional balance sheet is an unaudited balance sheet that is subject to change during the audit.
Your balance sheet captures the assets, liabilities and equity that your company owns or owes. On a balance sheet, assets equal liabilities plus owner's equity. Assets include short-term items such as cash, accounts receivable and inventory. They also include long-term items such as property, equipment and furniture. Liabilities include short-term items such as lines of credit and accounts payable and long-term items such as mortgages, term loans or capital leases. Owner's equity consists of the amount you contributed to start the company, any additional contributions to cover shortages or expand the company and retained earnings.
If your bank requests a copy of your third-quarter balance sheet when you are only two weeks into the fourth quarter and have not yet closed your third quarter, you would prepare and present a provisional balance sheet. You would explain to your bank that you have not yet closed your books for the time period the balance sheet covers. Therefore, those numbers are subject to change. Banks, investors and large vendors may request provisional balance sheets when they are making decisions regarding your business and want the most current financial statements they can obtain.