Business

What is the Balance Sheet, and What are its Objectives?

What is the Balance Sheet?

The balance sheet or statement of financial situation is a financial report that acts like a photograph by reflecting a company’s financial position on a specific date. Therefore it can be made up of asset accounts (what the company owns), liabilities (debts), and the difference between these, equity or stockholders’ equity. This report is usually made at the end of the company’s fiscal year on an annual basis (final balance); however, for information purposes, you must make them on a monthly, quarterly, or semi-annual basis for better monitoring.

What are its Objectives

Financial statements are an essential part of a company’s information since they reflect the general economic situation and also are very useful for decision-making in different areas such as investments, purchases, sales strategies, price lists, requests for loans, and also payment planning. For this aim, it is essential to know and analyze them correctly. Today, we want to tell you what the balance sheet is as a company’s financial report.

Deficient. The information you obtain from a balance sheet must be considered for the day it is made since the company’s financial situation will have changed over the days. This financial statement is of great importance to inform the owners, associates, and shareholders if the company’s operation has been carried out correctly, if the resources have been managed efficiently and also if the results of these processes are optimal or unsatisfactory. It is a good reference point to know the organization’s financial health.

Balance Sheet Structure

The organization of the statement of financial position or balance sheet is divided into three main items:

1. Assets

This section includes everything that the company has of value  and is classified in order from greater to less liquidity  as follows:

  1. a) Currency: These are the rights, assets, or credits that can convert into cash within less than one year or at the end of the fiscal year. The following ledger accounts are include in this category,
  • Cash register
  • Banks
  • Accounts receivable
  • Inventories
  1. b) Fixed: A fixed asset is an asset owned by the company, whether tangible or intangible, that does not turn into cash in the short term, and that is generally necessary for the operation of the company, so it is not used for the sale. The following accounting accounts are included in this category:
  • Machinery and equipment
  • Transportation
  • equipment Furniture and office
  • Computer equipment
  • Buildings
  • Land
  1. c) Deferred: They are not strictly active but are consider in this section. Therefore they represent costs and expenses that have been postpone to be charge in future periods.

2. Liabilities

They are the debts or obligations that the company has, in this section, it is represent what is owe to third parties, banking institutions, suppliers, etc. They are classify according to the level of enforceability, that is, the term in which they have to be settle, being as follows:

  1. a) Current: These are the company’s debts with a term of less than one year, considered short-term and intended to be in constant rotation. Some of the accounts they include are,
  • bank obligations
  • Accounts payable to suppliers
  • Customer advances
  • Accounts payable to creditors
  • Taxes to pay
  1. b) Long-term: This item identifies the debts contracted by the company that must settle in a period greater than one year. For example:
  • Bank credits
  • Documents to pay
  1. c) Deferred: In this classification are the debts whose application corresponds to the results of future fiscal years at the balance sheet date.

3. Patrimony or Capital

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

Balance Sheet Objectives

Since we know the balance sheet, it is essential to know it. The primary purpose of a balance sheet is to understand the company’s financial position in a given period. By making this report, we will obtain relevant information to make business decisions, such as:

  • nature and value of assets
  • Nature and scope of obligations
  • Current capital capacity
  • Business solvency

Other Objectives of the Balance Sheet are as follows:

  • Surplus or insufficient funds in cash, banks, or investments.
  • Surplus or shortage of inventories due to erroneous planning of purchases.
  • High amounts of credit sales and also collection inefficiency.
  • Excess of debts contracted

Balance General in SAP Business One

Having strategic, timely, and reliable financial information helps you make important decisions for your company’s growth more accurately. Rely on an effective and powerful tool such as the  ERP for growing companies SAP business One, through which you can have an effective and comprehensive administration of your company’s finances as well as critical financial reports to take your company to higher levels of profitability.

Conclusion

In financial book-keeping, a balance sheet is a summary of the financial balances of a single or group, whether it be a sole proprietorship, a business partnership, a corporation, private limited company, or other association such as a government or not-for-profit entity

Also Read: What is B2B? – Model, Tools, and more

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