It is a must for any company to conduct a financial analysis for their business. Regular financial analysis helps a company determine trends in its business and strategize plans to increase sales or profit. There are three core financial statements used to successfully and effectively conduct a financial analysis, and they are the income statement, the cash flow statement, and the balance sheet. In this article, we will discuss more on the balance sheet and determine why it is considered one of the three important financial analysis.
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What Is a Balance Sheet?
There are three main things to consider in a balance sheet, and they are assets, liabilities, and shareholder’s equity. A balance sheet provides a report on those three main things on a specific date. The financial statement is also used to provide a snapshot or summary of how much the company owns, owes, and the amount of shareholders investment. The computation of return rates and evaluation of the company’s capital structured is based on a balance sheet.
Now, why do think a balance sheet is called such? The formula used for a balance sheet is: Assets = Liabilities + Shareholder’s Equity. Assets represent what a company owns, like cash, inventory, and properties. Liabilities include rent, paycheck, utilities, taxes, and loans. Shareholder equity came from the company’s retained earnings. To increase assets, the company takes on liabilities by borrowing money from the bank or a lending institution, or take money from investors. By doing so, the company’s assets increase, as well as its liabilities and shareholder’s equity. It balances the two sides, and that is why it’s called a balance sheet.
How to Make a Balance Sheet
Making a balance sheet template allows you to create a balance sheet anytime quickly when you need one. You can use the saved template several times or whenever it’s time to make financial statements for reporting. The best balance sheet is one you designed and made on your own. Here are simple steps that will help you get started.
1. Set Up Your Balance Sheet
Remember that a balance sheet provides a report on the company’s assets, liabilities, and shareholder’s equity. Divide your spreadsheet template into three parts, leaving enough space on top for the header. Label each part as assets, liabilities, and shareholder’s equity. Add more columns and rows if needed.
2. Add the Header
The topmost part of your sheet should contain the header. Of course, the header should bear the words balance sheet with the name of the company or organization below it. Since the balance sheet is a financial report of assets, liabilities, and equity for a particular day in a year, make sure to add the effectivity date of the balance sheet below the name of the company or organization.
3. List and Calculate Assets
In the assets section, list all of the company’s current assets, non-current assets, or long-term assets, including intangible assets in order. Add the total of the current and non-current assets and label this in your balance sheet as the total assets.
4. List and Calculate Liabilities
Write here the current liabilities or the fixed liabilities and get its subtotal. Long-term liabilities and subtotal should follow it. Add up the subtotal of both current and long-term liabilities. This will be labeled total liabilities in the balance sheet.
5. List and Calculate Shareholder’s Equity
Determine the company’s retained earnings to calculate the shareholder’s equity or the owner’s equity. Use the formula below:
Retained Earnings = Retained Earnings End Balance (from the previous balance sheet period) + Company’s Net Income – Dividends (paid to investors)
6. Balance All Three Components
Add up the total liabilities and the total shareholder’s equity. The resulting figures should be equal to that of the total assets. If the result is not balanced, then find the mistake by going back on your work and review your entries. You may have omitted or added something twice.
What is the difference between a balance sheet and a cash flow statement?
A balance sheet is a financial statement that shows the summary of a company’s balances in terms of its assets, liabilities, and equity. A cash flow statement, on the other hand, shows inflow and outflow of cash in a company for a period of time. In other words, it shows how the cash position of the company is affected by the changes or activities in a balance sheet and an income statement.
Who would be interested in a balance sheet?
Entities who would be interested in a balance sheet are creditors or bankers, current and potential investors of the company, suppliers of the company, competitors, government agencies, labor unions, and customers.
What are the limitations of a balance sheet?
A balance sheet is not effective on its own over a long period. It has to be compared with the balance sheet from the previous period and to other companies in the same business industry.
A balance sheet is both easy and difficult to make. The task tends to be tedious if there are a lot of details to list and calculate. But if there are just a few details on a single sheet, you’re sure to get the job done in no time. The task is made even easier with the availability of samples and templates that can be used for reference or as a personal template. So don’t skip the samples and templates above. They’re absolutely free!
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