The balance sheet, in simple terms, can be defined as a document or a statement that highlights the financial state of a company at any given date. Apart from the assets and liabilities of a company, the shareholder’s equity forms an essential part of this financial record. If you plan on pursuing an Accountancy course in order to build a flourishing career in Commerce, understanding the meaning of these terms is necessary.
While assets are the resources that are owned by a particular company, liabilities, on the contrary, are the funding sources of the company. The building or office space owned, the bank balance, the furniture, stationery, etc. are the assets of the company while the bank loans, capital burrowed or due services to customers are the liabilities. At the end of the day, a month or a financial year, the total assets should be equal to the liabilities as well as the capital invested in the firm. If this happens, then only it would be considered a “balance sheet”. Though
We have already discussed what a balance sheet actually is, how is it maintained and what are the main components. However, to know what is included in the balance sheet or its essential features in detail, go through the following points:
- A balance sheet is prepared on the last day of an accounting year.
- It is the last step of Final Accounts and is prepared after assessing trading as well as the profit and loss account. This is because the net profit and loss are to be included in the balance sheet through the capital account.
- It consists of all assets as well as liabilities accounts, but no expenses and revenues are shown.
- The two sides of the sheet must always be equal. That is,
Asset = Liability + Capital
This equation should always be followed otherwise the tally in the sheet would be considered faulty.
- The balance sheet describes nature as well as the value of the asset and the liabilities. One can also know the position of the capital on a particular date through this.
- It also takes into account the debit and credit balances of the personal as well as the current accounts. The debit balance in the real account is known as the asset of the firm. Credit balance, on the contrary, is counted in the personal account and is known as the liability of the firm.
Why is the Balance Sheet Important?
As discussed, maintaining a balance sheet is a very important component of running a business. It sheds light on the current financial position of the company, the funding resources as well as the profits earned. To make things more clear, the importance of the balance sheet has been summarised in the points below:
Through a balance sheet, the proprietors can understand the liquidity conditions of the firm i.e, how much they can afford their daily transactions, cash flow of the company, their working capital funding and trade receivable status.
Helps Investors Make Decisions
Also taught in the Entrepreneurship Development programmes, most investors try to look at the balance sheet of a company before deciding to invest in the same. They also try to follow the trends and assess various other parameters to check the growth of the company.
Helps Banks Understand the Company’s Net Worth
If a company wants to get a loan to finance their future investments and expansion plans, the bank would be looking at their balance sheet to understand whether the company is in a financial position to pay back the loan or not.
Determination of Risk and Returns
Maintaining a balance sheet can help you easily figure out whether you can meet your short-term obligations easily or not. If your liabilities side is increasing uncontrollably, there is a chance of bankruptcy and the firm running out of money
Balance Sheet Format
|Particulars||Schedule||Amount in Rs.|
|Equity and Liabilities|
|1. Shareholder’s fund|
Reserves and Surplus
|2. Non-current liabilities|
|Long term borrowings
Deferred tax liabilities
Long term provisions
|3. Current Liabilities|
|Short term borrowings
Other current liabilities
Short term provisions
|1. Non-current assets|
|2. Current assets|
Cash and Cash Equivalents
Short-term loans and advances
Hope this blog on the basic details pertaining to a balance sheet was an interesting and insightful read for you. If you also want to explore the fields of Finance or Commerce but are not sure how to go about it then Don’t worry! Reach out to our experts at Leverage Edu through an E-meeting and get all your doubts clear regarding courses, colleges, and application process!