What is a Balance Sheet?
The balance sheet is a financial statement which reports a company’s liabilities, shareholders’ equity, and assets at a certain period of time. This document is important because, along with other states, it is used in calculating financial ratios or conducting the fundamental analysis. Moreover, this document allows its reader, e.g. creditors, to know what the company owes to a financial institution or other parties and what the company owns.
Major Elements of this Financial Statement
There are four major elements in a balance sheet. They are:
The heading states the name of the company, the name of the financial statement (i.e. balance sheet), and the time in which the account balances apply. In other words, it is the title of this document.
The assets of the company are grouped into one segment. The accounts are listed in a certain order, which is based on their liquidity. The one that is most liquid is placed at the top. Assets are divided into current and long-term assets.
Those that are grouped as current assets are cash and cash equivalents, account receivable, marketable securities, inventory, and prepaid expenses. Meanwhile, those that are grouped as long-term assets are fixed assets, long-term investments, and intangible assets.
Liabilities are money which the company owes to other parties, for example, salaries, utilities, bills that must be paid to the suppliers and loans that must be paid to creditors. Liabilities are also divided into current liabilities and long-term liabilities. The current ones are those which must be paid within a year.
Shareholders’ equity is money that is attributed to shareholders. This particular balance sheet element is also called as net assets.
How to Make it
For you who never create this financial document before, you may feel a bit confused about making it. There are several steps that you need to perform. One of the most fundamental steps is printing a trial balance. This document is very essential in creating a balance sheet. You can get the trial balance from the accounting software you have.
Once you have a trial balance, you must make some adjustments to this document. After that, you need to eliminate all expenses and revenue accounts. Next, the remaining accounts in this report must be aggregated into cash.
Creating a balance sheet must be done carefully. You must cross-check your balance sheet so that you can be sure that the total amount of your assets equals the total liability and shareholders’ equity. If you need help in creating this financial statement, you may need to reread your textbook on this particular subject or ask your colleagues for help.
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