Balance sheet - What is a balance sheet?
A balance sheet is a financial statement that shows what the business is worth at a given point in time
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The purpose of the balance sheet is to provide an idea of a company’s financial position. It does so by outlining the total assets that a company owns and any amounts that it owes to lenders or banks, for example, as well as the amount of equity.
Balance sheets do not show results, even if they can be inferred by comparing the balance of accounts from different time periods.
A standard company balance sheet has three parts: assets, liabilities, and owner’s equity or capital.
For larger limited companies, a balance sheet must be filed once a year as part of the company's statutory accounts.
How the balance sheet works
The balance sheet has two sides that must be equal or balance each other out. The logic behind it is more simple than it seems: a company must pay for its assets by borrowing money from lenders or through investors.
If Tom’s company takes out a £5,000 loan from the bank, the assets would increase by £5,000, but the liabilities would also increase by £5,000, which effectively balances the accounts.
So, the formula behind the balance sheet is:
Assets = Liabilities + Owner's Equity
The balance sheet provides a snapshot of a company’s accounts at a given point in time. The balance sheet, along with the income and cash flow statement, is an important tool for owners but also for investors because it is used to gain insight into a company and its financial operations.
It is important that investors understand how to use, analyse, and read the document.
In the balance sheet, the total value of assets represents an important part of the equation. Assets are an indication of a company’s holdings and contribute to overall value.
In the balance sheet, the total liabilities is the total money owed, whether to a lender, bank, or supplier. In relation to the assets, it provides an idea of how stable a business is, as well as whether accounts are overdue.
Owner’s equity refers to the money that can be considered the net assets. It is the assets minus the liabilities. Any remaining value in assets can be attributed to owner’s equity.
Balance sheet and Debitoor
Thankfully, modern invoicing and accounting software makes balancing your assets, liabilities and owner’s equity a bit easier. With Debitoor, you can view your balance sheet, which automatically updates when you enter new details, at any given time and select the time frame.
No longer do you need to spend time painstakingly combing through a spreadsheet. The balance sheet gathers and provides the information regarding your accounts. All you need to do is keep them up to date!