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What is a Balance Sheet?

The Balance Sheet shows your financial accounts and relationships as of Right Now. The Balance Sheet is a financial statement that explains the financial Balances of an entity at a Single Point in Time.
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THE PURPOSE

The purpose of any financial statement is to provide information about an entity’s transaction history that is USEFUL for internal and external users

You can read more about accounting and the purpose of Financial Statements here (refer to What is accounting blog)  

Financials must also be made using the Accrual Method of Accounting if prepared for external users. (refer to accrual blog)

Depending on your age, business structure, and personal preference, the Balance Sheet can also be called the Statement of Financial Position.

 

THE BALANCE SHEET IS A TOOL

The Balance Sheet is a financial statement that explains the financial Balances of an entity at a Single Point in Time

In other words…

The Balance Sheet shows your financial accounts and relationships as of Right Now.

 

WHAT IS THE BALANCE SHEET EQUATION?

The Balance Sheet explains the Fundamental Accounting Equation where:

 

Assets = Liabilities + Equity

 

The Balance Sheet uses the Following Accounts:

  • Assets

  • Liabilities

  • Equity 

 

WHAT IS AN ASSET

Asset = probable future economic benefit as a result of operations. 

In other words…

 

The Core Business is going to benefit financially or economically from the use of the “Asset” 

 

For Example:

Machinery that generates products to sell creates revenue.

 

WHAT IS A LIABILITY?

Liability = probable future economic sacrifices as a result of operations arising from a present obligation to transfer assets the company owns. 

In other words…

 

The Core Business is going to reduce its Assets from the obligation of the “Liability”.

 

For Example: 

Taking a business loan to purchase the machinery obligates the company to monthly payments, reducing its cash-flow each month (Cash = an Asset).

 

WHAT IS EQUITY?

Equity (aka Capital aka Shareholder aka Partners Accounts) = residual interest in the net assets of the company.

 

NET ASSETS = ASSETS LESS LIABILITIES. 

 

In other words…

 

The company has positive Equity Balances when Assets are greater than liabilities.

 

 

WHAT IS THE BALANCE SHEET USED FOR?

The Balance Sheet helps the user understand how the entity has efficiently leveraged its Assets, Liabilities, and Equity accounts to produce profits, as seen by the Income Statement (refer to Income St. blog)

 

WHAT ARE SOME HELPFUL RATIOS?

Financial statement ratios help users to gather the information important to analyze the entity’s past, current, and future operations.

Some ratios used from the Balance Sheet accounts include: 

  • Gross Profit Margin

  • Working Capital

  • Current Ratio & Quick Ratio

  • Accounts Receivable Turnover (ratio and in days)

  • Accounts Payable Turnover (ratio and in days)

  • Inventory Turnover (ratio and in days)

  • Operating Cycle

Disclaimer:
This publication is designed to provide information on federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.

This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.

This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.

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