The balance sheet can be considered as one of the key financial statements in an organization that helps to determine the financial stability of the company. Stakeholders (investors, competitors, government, customers, etc.) are always focusing on the financial statements in order to measure the current performance of the organization. This article explains the ways to prepare a balance sheet and its importance for the organization.
Why is a Balance Sheet Important
The balance sheet is an important document which is prepared by the organization in order to summarize the financial position of the company. It is prepared at the end of the financial period considering all the transactions that took place within the period. To create a balance sheet the following accounting equation is being used.
Total assets = Total liabilities + Equity
The balance sheet can be used as the basis for ratio analysis, in order to determine the liquidity of a business. Liquidity expresses the company’s ability of paying the liabilities.
The balance sheet can be prepared in two forms either as a vertical balance sheet or a horizontal balance sheet. In the vertical format, all the items are indicated down the left side of the page and in the horizontal format, the asset line items are listed down the first column while liabilities and equity line items are listed in a below column).
What are the Components of a Balance Sheet
Balance sheet comprises with three key elements such as assets, equity and liabilities. The assets can be divided into two categories as non-current assets and current assets. The liabilities can be divided into current liabilities and non-current liabilities.The components that are included under these key elements can be listed as follows:
• Property, plant, and equipment
• Intangible assets
• Trade and other receivables
• Cash and cash equivalents
• Assets held for sale
• Capital stock
• Retained earnings
• Additional paid-in capital
• Trade and other payables
• Current tax liabilities
• Accrued expenses
• Current portion of loans payable
• Other financial liabilities
• Liabilities held for sale
• Loans payable
• Deferred tax liabilities
• Other non-current liabilities
Balance Sheet – Example
With the advances in the information technology, most organizations are using various accounting software programs like QuickBooks Accounting Software, MYOB, etc. to prepare balance sheet in order to maintain the accuracy, and also to save time in the accounting calculations. It has made the accountant’s tasks easier than before. After doing all the calculations, there are various statistical software that have been used by them for the analysis and to make forecasts for the future.