In basic accounting terms, a balance sheet details a company’s financial positions at any time. It is usually presented in two different forms: a balance sheet report and a statement of comprehensive income. The first form is used to prepare the year-end financial records for a particular company. The second form is used to make a more detailed presentation of the company’s quarterly results.
Purpose of Balance Sheets
In accounting, a balance sheet records the financial results of a firm as of a specific date. This includes all assets and liabilities of the company, including current and long term debts. This document can provide valuable information for assessing the overall health of a firm as well as assessing potential problems and working methods. This allows business owners to make quick decisions about their businesses and their investments. Balance sheets are therefore crucial to the success of almost every type of business.
Types of Balance Sheets
There are two types of balance sheets that need to be prepared. The first type is the Statement of Comprehensive Income or commonly called the C.O.I. A balance sheet that reports C.O.I. must be prepared monthly and generally reports the following:
All investing activities are reflected in the balance sheets. The net amount of investment that has been made is also recorded. This represents the number of cash inflows as well as the outflows. A major portion of any financial health assessment of a firm is based on this balance sheet.
Financial ratios are another important aspect of balance sheets. They are a ratio of assets to liabilities. This indicates the health or the potential health of an organization. A positive or healthy ratio indicates an ability to produce a profit while a negative or poor ratio indicates a loss in profitability. In general, the larger the company, the higher the financial ratios tend to be. As such, investors who are concerned with the health of their companies typically prefer to view their balance sheets as a measure of the organization’s financial health rather than as an indication of its equity.
The balance sheets are divided into two sections. The first one contains the accounts Receivables Accounting records the sales and purchases of goods and services by customers and suppliers and their respective balances. The second section includes the Accounts-payable section which includes the items such as accrued expenses, payable expenses, capitalized revenue, and other costs associated with the ownership of assets and liabilities. The balance sheets are not comprehensive since they only report the balances of what is owed. They do however provide a good measure of the companies overall solvency and viability. The liquidity section of the balance sheet provides information on the banks holding of the companies’ assets, liquidity reserves, the current market value of assets and liabilities, long term and short term assets and liabilities, and inter vivos loans.
There are several standard ways to examine financial ratios such as the PEG ratio, the SME/SEO Ratio, and the Return on Equity. The Quick Tests of Compound Interest are also used to examine balance sheets. These include the CUSIP, acci, log, and sterling methods. Balance sheet reports are used in the United States by publicly listed corporations to assess their ability to finance their operations. These reports are widely used around the world as well.
A balance sheet can be prepared in different ways. The most traditional method is to add sales and purchase items together to show the revenue item. Then all the revenues reported should be added and shown against expenses. Then the income amount is added to show the income item. Finally, all debts are shown against assets.