A balance sheet is often described as a “snapshot” of the financial health of a business. It enables a business to determine whether it is running out of cash as it continues to operate or whether things are moving along as smoothly as they should be.
It is considered the financial statement of a company and within it, the liabilities, assets, equity capital and total debt of the business are listed.
A balance sheet is usually calculated after either every quarter, six months or year. Within the balance sheet, it is expected that the sheet is split into two – one side includes the assets, the other includes liabilities.
Although it’s a snapshot of a company’s finances at a moment in time, alone it can’t give a true sense of any trends that are playing out over a longer period. It’s because of this that balance sheets should always be compared with those of a previous period, as well as those of other businesses in the same industry.
On the assets side you’ll find accounts listed in order of their liquidity. They’ll be divided into current assets which can be converted to cash in a year or less, and long-term assets which cannot.
Here are some examples of current assets you might find:
Long-term assets can include:
Liabilities are essentially the money that a company owes to outside parties. This includes things such as the bills it has to pay to suppliers, utilities, salaries and so on. A business’s current liabilities are those which are due within a year and will be listed in order of their due date on the balance sheet. Long-term liabilities have a due date of beyond a year.
Some examples of current liabilities are:
Long-term liabilities can include:
It’s important to note that some liabilities are considered “off the balance sheet” and won’t appear on a business’s balance sheet.
Yes, as it is a source of funds that supports a business’s assets. In order for the balance sheet to balance, the total assets you find on one side must equal the total liabilities plus equity on the other side.
Shareholder equity in a publicly traded company is the amount of money initially invested into the company plus any retained earnings. If at the end of the financial year, a company decides to reinvest its net earnings into the company, these retained earnings are transferred from the income statement to the balance sheet.
As a balance sheet shows a company’s financial health, companies with a strong balance sheet are more likely to survive a negative economic turn than those with a poor balance sheet. To have a strong balance sheet a business will need to have more assets than liabilities.
A business’s service revenue refers to the revenue they earn from performing a service. From an accounting perspective, service revenue is recorded on an income statement rather than on the balance sheet with other assets.
It’s important to note that revenue is used to invest in other assets, pay dividends to shareholders and to pay off liabilities, making revenue itself not an asset.
Long-term debt is any amount of debt a company has that has a maturity of 12 months or longer. It can be found on the long-term liability section on a company’s balance sheet. The time of maturity can range anywhere from 12 months to 30+ years and the type of debt can include (but is not limited to) the following:
Simply put, capital is the money available for immediate use on a company balance sheet. This could be used for any number of things such as keeping the day-to-day business running or launching a new product or service.
On a balance sheet it can be defined as working capital, equity capital or debt capital. How it’s defined will depend on its origin and how it’s intended to be used.
These are accounting entries that show money set aside to pay for future obligations. They’ll appear on a company’s balance sheet as liabilities. Reserves are particularly important for insurance companies as they represent the amount of money set aside for future insurance claims.
The reason why lenders want to see a business balance sheet is so they can ascertain the financial situation of a company before deciding to loan out money. It is important for lenders to understand the financial obligations of a business before deciding to go ahead with a loan.
Balance sheets are just one aspect of managing your business’ finances of course. You can find more handy explainers like this one in our Finance Glossary.
5 August, 2022