What is the balance sheet and what are its objectives?

What is the balance sheet?

The balance sheet or balance sheet is a financial report that serves as a snapshot of a company's financial position as of a given date. It is made up of asset accounts (what the company owns), liabilities (debts) and the difference between them, which is the equity or stockholders' equity. This report is usually made at the end of the company's fiscal year on an annual basis (final balance sheet), however for information purposes it is important that you make them on a monthly, quarterly or semi-annual basis for a better follow-up. Let's start learning what the balance sheet is.

Financial statements are an essential part of a company's information since they reflect the general financial situation and are very useful for decision making in different areas such as: investments, purchases, sales strategies, price lists, loan applications and payment planning. This is why it is essential to know them and analyze them correctly. Today we want to focus on the balance sheet as a company's financial report.

In previous articles we shared with you information about the income statement and the information it provides for your company. This time we are going to focus on another of the main financial statements that you should have in your organization to get a complete picture of the financial performance with a balance sheet.

The information you get from a balance sheet should be taken into account for the day on which it is made because, as the days go by, the company's financial situation will have changed. This financial statement is of great importance to let the owners, partners and shareholders know if the operation of the company has been carried out in the correct way, if the resources have been efficiently managed and if the results of these processes are optimal or deficient. It is a good reference point to know the financial health of the organization.

Structure of the Balance Sheet

The structure of the balance sheet is divided into three main items:

1. Assets

This section includes everything of value that the company owns and is classified in order of highest to lowest liquidity as follows:

a) Current assets: These are the rights, goods or credits that can be converted into cash within a period of less than one year or at year-end. This category includes the following accounting accounts,

- Cash

- Bank accounts

- Accounts receivable

- Inventories

b) Fixed assets: A fixed asset is an asset owned by the company, whether tangible or intangible, that is not converted into cash in the short term and is generally necessary for the operation of the company and therefore is not intended for sale. The following accounting accounts are included in this caption:
  • Machinery and equipment
  • Transportation equipment
  • Office furniture and equipment
  • Computer equipment
  • Buildings
  • Land
c) Deferred charges: These are not strictly speaking assets; however, they are considered in this section. They represent costs and expenses that have been postponed to be charged in future periods.

2. Liabilities

These are the debts or obligations that the company owes to third parties, banking institutions, suppliers, etc., and are classified according to the level of demand. They are classified according to the level of exigibility, that is to say, the term in which they have to be liquidated, as follows:

a) Current: These are the company's debts with a term of less than one year, which are considered to be short term and are intended to be in constant rotation. Some of the accounts included are
  • Bank obligations
  • Accounts payable to suppliers
  • Advances from customers
  • Accounts payable to creditors
  • Taxes payable
b) Long-term: This item identifies the debts contracted by the company that must be settled in a period of more than one year. Such as, for example:
  • Bank loans
  • Notes payable
c) Deferred: This classification includes debts whose application corresponds to the results of future years as of the balance sheet date.

3. Equity or Capital

It represents the resources that the partners or owners have invested in their company. The total amount of assets must be equal to the sum of total liabilities plus capital.

Types of Balance Sheets

Balance Sheet: Comparative

The comparative balance sheet allows evaluating the financial behavior of a company with different periods of the year, adding a column with the variation with respect to the previous year or periods in order to trace its financial history and be able to determine its performance in comparison.

Balance Sheet: Consolidated

The consolidated balance sheet is a business document that shows the economic situation through the financial statements of a group of companies, as well as their accounting.

Balance Sheet: Estimated

The estimated balance sheet is made with preliminary data, subject to correction and subsequent modification, which must then be corroborated to have the final version.

Balance Sheet: Proforma

The pro forma balance sheet is prepared with future estimates of the financial situation, in order to foresee a problem or anticipate a situation that has not yet occurred and to have an immediate solution if it should arise.

Objectives of the Balance Sheet

Now that we know what the balance sheet is, it is important to know what it is for. The main purpose for which a balance sheet is prepared is to know the financial position of the company in a given period. By making this report, we will obtain relevant information to make business decisions, such as, for example:

- Nature and value of assets

- Nature and extent of liabilities

- Current capital capacity

- Solvency of the business

Other objectives of the balance sheet are the following:

(a) Surplus or shortage of funds in cash, banks or investments.

b) Surplus or shortage of inventories due to erroneous purchase planning.

c) High amounts of credit sales and/or collection inefficiencies.

d) Excess of contracted debts.

Balance Sheet in SAP Business One

Having strategic, timely and reliable financial information helps you make important decisions for the growth of your company in a more accurate way. Lean on an effective and powerful tool as the ERP for growing companies SAP Business One, through which you can have an effective and comprehensive management of the finances of your company as well as key financial reports to take your company to higher levels of profitability.