If you have a business and you’re assessing your finances, you will have heard of a balance sheet. A balance sheet is a tool to help businesses and their financial teams understand their assets and liabilities. It can help them feel comfortable with where they are, as well as plan for the future of their companies. First things first, let’s understand what a balance sheet is and how it can help you understand your business.
What Is A Balance Sheet?
A balance sheet serves as a concise representation of a business’s financial standing by giving a snapshot at a given point in time, detailing its assets, liabilities, and shareholders’ equity. By encapsulating these fundamental components, the balance sheet provides companies with a precise overview of their financial position, facilitating informed decision-making and strategic financial planning. The three main constituents of a balance sheet are assets, liabilities, and shareholders’ equity.
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Assets
A company’s assets are the items of value that are owned by that company. This could include cash, investments, equipment, plant and machinery and trade debtors. They are the means which can be used in order to run and operate the company.
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Liabilities
Liabilities are sums of money that a company owes. Examples of liabilities can include loans, mortgages, deferred revenues and warranties.
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Shareholders’ Equity
The shareholders’ equity is the remains of the liabilities subtracted from the company’s assets. It is the value of the business’s obligation to the shareholders.
The Formula Of Your Balance Sheet
There is a formula that balance sheets must follow. This is: assets = liabilities + shareholders’ equity. The two sides of a balance sheet must balance each other – hence the name.
A balance sheet is laid out in a comprehensive manner. The assets will typically be at the top or on the left of the sheet, and the liabilities and the shareholders’ equity will be below it, or to the right. This makes it easier to read and understand, and can help you to compare the figures against each other.
What Is The Purpose Of A Balance Sheet?
A balance sheet is a snapshot of a business at a point in time. The purpose is that it allows a company to get an accurate impression of their current finances. From this point, it’s easier to make a forward projection for future budgets and forecasts. The amount of growth that is possible for your company can be predicted with the help of your up-to-date balance sheet. Importantly, a balance sheet shows a business whether or not they are in positive net worth. It also lets them know if the business is capable of paying the necessary outgoings, whilst making a profit.
If you’d like to find out more about how to understand a balance sheet and the positive impact it can have for your business, get in touch with our team at Omer & Company Accountants. We are available on 020 8850 0700 or send an email to info@omeraccountants.co.uk. We’d love to offer our assistance.
