The balance sheet, also called Accounting Balance, has the main target of establishing far reaching command over the company’s assets and freedoms. Besides, it plays a crucial job in identifying available wellsprings of assets and investments.
Unlike cash flow control, the balance sheet offers a comprehensive view of the company’s situation, providing a detailed survey of the business situation in specific periods. In other words, it provides a deeper and more holistic analysis of the organization’s financial health.
The balance sheet doesn’t focus on cash inflows and outflows yet categorizes and quantifies assets, liabilities, and shareholders’ value to get a total understanding of the financial position.
To put it plainly, the balance sheet isn’t simply an accounting formality yet is a strategic instrument that enables managers and leaders to understand the company, plan, and streamline the utilization of the company’s assets toward the achievement of its financial and development targets.
What is the purpose and importance of the balance sheet?
Besides being a necessity in financial management, the balance sheet is provided for in the Civil Code for most companies, helping leaders understand the real value of the organization and ensuring better conditions for managing the business.
However, anyone who thinks that the balance sheet is just an indicator of the organization’s financial health is mistaken. Furthermore, the document assists and provides bases for calculating the returns obtained from investments, as well as the capital structure.
Among the main objectives of the balance sheet are:
- Assessment of the company’s financial behavior;
- Guidance for targeted decision making;
- Development of data-based action plans;
- Efficient tax identification and planning;
- Use as an escape valve in challenging financial situations.
In short, the balance sheet is like a financial map of the company. It helps you understand how money is being used, guides important decisions, supports action plans, assists with tax management and acts as a valuable resource in times of financial difficulties.
What is the balance sheet structure like?
It is crucial to understand the structure of the balance sheet to avoid mistakes during its preparation. Generally, the report follows a standard that includes the start and end date, details about assets and liabilities, and net worth.
Want to better understand this structure? So pay attention to the explanations below.
To understand the structure of the balance sheet, the first step is to understand the fundamental division between:
- Assets (what the company owns);
- Liabilities (what you owe);
- Her net worth (what is really hers).
This simple distinction makes it easier to efficiently analyze a company’s financial state.
Active
Assets are everything the company owns, such as goods, resources and cash on hand. Depending on the activity, machinery, equipment and even software also come into play. In short, everything that can be coated in monetary income are assets.
There are two fundamental concepts for assets:
Current assets
Representing assets that the company can change over into cash temporarily, for example, cash on hand, accounts receivable and inventory.
Non-current asset
Covers assets with greater value and long-term liquidity, such as real estate, land and vehicles.
Knowing how to differentiate the two straightforwardly helps in understanding how much the company has available immediately versus its drawn out investments.
Liabilities
Dissimilar to assets, liabilities address the company’s obligations and financial obligations, like loans or regular costs, including worker salaries, taxes, and service bills. In other words, they are responsibilities that lessen the organization’s assets.
Hence, as liabilities increase, the company’s market value will in general decrease. This relationship features the importance of carefully managing liabilities to protect and enhance the company’s total value.
Liabilities are also isolated into two categories: current liabilities and non-current liabilities.
Current liabilities
Refers to all obligations with a maturity date of one year or less, covering responsibilities, for example, labor obligations, taxes, amounts owed to providers, and loans with regularly scheduled payments, among others.
Categorization as current liabilities features the momentary nature of these financial obligations.
Non-current liabilities
Just like non-current assets, non-current liabilities are obligations with maturities greater than one year, long-term debts, such as provisioned credits, financing, and debentures, among others.
Net worth
Net Equity is everything that the company has in terms of capital, that is, the calculation of assets and liabilities to arrive at the value that the company actually has. The sum of all resources, investments, reserves, social capital, among others.
This way, the company will have a clear view of its available capital. This not only helps in identifying financial ratios, but also in presenting returns to shareholders and partners, including reserves and accounting adjustments, providing a solid basis for the sustainable expansion of the business.
Balance sheet analysis reveals whether a company operates in a “positive” or “negative” scenario, offering crucial insights into its financial situation.
Understanding this concept allows proactive actions to be taken to reverse possible unfavorable scenarios, preserving and strengthening the company’s financial health.
How to make a company’s balance sheet?
You already understand the definition and relevance of collecting information for the balance sheet. Now, it is crucial to understand how to create it. Although it is not an intrinsically complex process, it is essential to have knowledge of accounting procedures to ensure accurate and reliable assembly.
Check it step by step:
Step 1
Detailed description of all accounting assets and liabilities, organized in order of liquidity and dates to provide a clear and systematic view of the company’s finances.
Step 2
Comparative analysis of accounting balances, carried out by reconciling bank statements and records in accounting books, aiming to guarantee the accuracy and integrity of financial information.
Step 3
Conduct calculations to determine whether, over the accounting period, the company recorded a profit or loss. In other words, carry out the Annual Result Assessment (ARE) to evaluate the organization’s overall financial performance.
Step 4
Finally, organize the balance sheet accounts, highlighting whether there was a profit or loss, clearly pointing out the positive balances of gains and accumulated losses. This simplifies understanding the company’s financial performance.