What is a Balance Sheet?
A balance sheet in financial accounting is a summary or list of financial balances for an individual or company. It can be sole proprietorship, business partnership, corporation, private limited company, or any other entity such as government or non-profit.
- What is a Balance Sheet?
- Purpose of a Balance Sheet
- Type of Balance Sheets
- Classified Balance Sheet
- Common Size Balance Sheet
- Comparative Balance Sheet
- List of items for a Balance Sheet
- Balance Sheet Examples
- Balance Sheet for Accounts Receivable Financing
- Steps to prepare a balance sheet
- Step 1: Select the balance sheet date.
- Step 2: List all your assets
- Step 3. Add all your assets
- Step 4 : Determine the current liabilities
- Step 5: Calculate long-term liabilities
- Step 6: Add liabilities
- Step 7: Determine the owner’s equity
- Step 8. Add the owners’ equity and liabilities.
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Purpose of a Balance Sheet
A balance sheet, a financial document that shows how much a company is worth (or its book value), is used to show the exact amount of money a company is worth. This is done by listing and tallying all assets and liabilities of the company as of a specific date. Also known as the reporting,
Type of Balance Sheets
A balance sheet is a part of financial statements that are issued by a company. It informs the reader about the assets, liabilities and equity of the entity as of the balance sheets date. There are many balance sheet formats. The most common balance sheet formats are the common, comparative, common size, and vertical. These are described below.
Classified Balance Sheet
The classified balance sheet format provides information about an entity’s assets and liabilities. It is also used to classify accounts into subcategories. This is the most popular type of balance sheet presentation. It consolidates a lot of accounts into one format that is easy to read. To make information more comparable, accountants should present balance sheet information using the same classification structure for multiple periods.
Common Size Balance Sheet
Common size balance sheets format displays not only standard information but also a column which notes the same information in either a percentage (for asset line items), or a percentage (for shareholder’s equity or liability line items). This is useful to create trend lines that allow you to compare the changes in size between accounts.
Comparative Balance Sheet
Comparative balance sheets present side-by-side information on an entity’s assets and liabilities as well as shareholders’ equity at multiple points in time. A comparative balance sheet might, for example, show the balance sheet at the end of each calendar year for the last three years. It can be useful to highlight changes over time.
List of items for a Balance Sheet
The company’s balance sheet contains information about its assets and liabilities. This could include cash and accounts receivables, but also long-term assets like property, plant and equipment, depending on the company.
Balance Sheet Examples
A balance sheet provides a snapshot of the financial situation at a particular point in time. A balance sheet, along with an income statement or cash flow statement can be used by business owners to assess their company’s financial standing.
Balance Sheet for Accounts Receivable Financing
The business is able to receive money as cash that replaces the value of accounts receivable financing on the balance sheet. Businesses may also need to write off the balances that are not financed, which will differ based upon the ratio principal/value decided in the contract.
According to the terms of the agreement the financier can offer as much as 90% amount of invoices that are outstanding. This kind of financing could be accomplished through linking accounts receivable data with an accounts receivable financer. The majority of factoring platforms are compatible with the most popular small-scale bookkeeping software like Quickbooks. Connecting technology to provide a user with a better experience for company, allowing it to sell invoices when they are paid, receiving instant funding from a factoring service
Steps to prepare a balance sheet
Once you’ve figured out what’s included in the account of balance, what can you create your own? The steps are:
Step 1: Select the balance sheet date.
Balance sheets are intended to display all the assets and liabilities of your business as well as equity of shareholders on a particular day of the year or over a certain amount of time. The majority of companies produce reports on an annual basis, usually the day that falls between the months of March and June and September. Then, December. Businesses may also decide to create balance reports in a month-to-month basis in which case they’d publish on the final day of every month.
Step 2: List all your assets
Once you’ve established an appointment date, the next step is to list the assets in distinct line items. To ensure that this section is more actionable you should separate them by liquidity. The more liquid assets like cash and accounts receivable are the first to be listed and non-liquid assets like inventory are last. When you’ve listed your current assets it is time to include other non-current (long-term) one. Make sure to include non-monetary assets , too.
Step 3. Add all your assets
After defining your different asset categories and then adding them all together. The final total will fall under the category of total assets. To ensure that your figures are accurate, check this number against your general ledger of your company.
Step 4 : Determine the current liabilities
The current liabilities are due within one year from the date of balance sheet. This includes notes payable to accounts, short-term note payable and accrued liabilities.
Step 5: Calculate long-term liabilities
It is important to list the obligations that will not be paid off within the next year. These include long-term note and pension plans, bonds payable and mortgages.
Step 6: Add liabilities
Add the current liabilities subtotal and the long-term liability subtotals to calculate all your liabilities.
Step 7: Determine the owner’s equity
Find out your company’s working capital and retained earnings as well as the equity of the shareholders. Retained earnings refer to the profits of the business that are reserved for reinvestment (not paid out in dividends for shareholders). Equity of shareholders is the sum of shares capital and retained earnings.
Step 8. Add the owners’ equity and liabilities.
If your equity + liabilities equals assets, then you’ve calculated the balance in the correct way. If not it, you’ll need revisit your work.
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