What is the Balance Sheet Report

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Did you know that all it takes to better understand a company’s or organization’s financial position is a few quick calculations using data from its balance sheet? A company’s balance sheet is only one component of its consolidated financial statements. However, it provides a sense of how healthy a business is at a specific point in time. So, whether you are a potential investor, a current business owner, or a financial manager, you are aware that the balance sheet is one of the most important financial statements. Here you will read about what is the balance sheet report and if you want to know more about QuickBooks features like QuickBooks pro advisor then click on this link.

And, because a balance sheet is a snapshot of how your business is doing, it’s crucial to know your way around one and be able to parse the info it provides. So here is your balance sheet explained.

A statement of financial position, also known as a balance sheet, is a financial report that details a company’s assets, liabilities, and shareholders’ equity over a specific time period. A balance sheet, in essence, shows what the organization owes and owns over a specific time period. This is critical because the balance sheet report reflects the organization’s financial situation.

Why Every Business Needs a Balance Sheet

Generally speaking, one can measure the strength of a company by looking at three broad categories of investment-quality metrics: working capital, asset performance, and capitalization structure.

Working Capital

The difference between an organization’s current assets (cash, investments, and annual revenue) and current liabilities is referred to as working capital (i.e., payables owed to suppliers). Working capital reflects an organization’s cash conversion cycle as well as its ability to manage two critical assets: accounts receivable and inventory.

Asset Performance

The ability to take operational resources, manage them, and generate profitable returns is referred to as asset performance. The return on assets (ROA) ratio is a metric for determining an organization’s asset performance.

Capitalization

The amount of debt compared to equity on a company’s balance sheet is referred to as capitalization.

To truly comprehend how a business operates, you must first comprehend the balance sheet and how to calculate a company’s working capital, asset performance, and capitalization.

What Are the Components of a Balance Sheet Report?

A balance sheet is a snapshot in time, not a forecast of long-term fiscal trends. However, comparing your balance sheet to previous ones can assist you in deciphering those long-term trends and results.

Here are the elements and components of a balance sheet, as well as how they function.

Assets

The asset section represents what an organization owns and can convert into cash if necessary. This section is divided into subsets and is listed on the balance sheet in the following order of liquidity:

Money and its equivalents
Accounts payable
Expenses paid in advance
Inventory
Invested capital (i.e., property)
Assets can be further subdivided into categories such as:

Current assets are those that can be converted to cash in as little as a year (i.e., accounts receivable, inventory, etc.).

Long-term assets require more than a year to recoup your investment (i.e., real estate).

Assume you own a fancy chocolate company called “Gold Mountain,” and your assets, in order of liquidity, are as of January 2020:

$1,025 in the bank
$3,050 in accounts receivable
$450 in supplies/inventory

Liabilities

Your liabilities will appear next on your balance sheet (i.e., what a business owes others). Liabilities, like assets, are divided into two categories: current (due within a year) and long-term (the due date is more than a year away).

Among your current liabilities are:
Accounts receivable (items you bought on credit)
Wages for employees based on the number of hours worked
Loans that must be repaid within a year
Any taxes that are owed
Here are some examples of (non-current) long-term debts:
Loans that do not have to be repaid within a year
Bonds issued by your company
Liabilities for our fictional chocolatiers could include:
$75 in Accounts Payable
$1,000 in long-term debt
$1,075 in total liabilities

Shareholder’s Equity/Owner’s Equity

Equity refers to monies currently held by a company. For sole proprietorships, the category is called “owner’s equity,” and for corporations, this is known as “stockholders’ equity.” This section displays the parts that business owners/shareholders possess.

Owners’ equity:

Capital or the money invested into the business by the owners
Private or public stock
Retained earnings, i.e., all revenue minus all expenses since the launch
Equity can also drop when an owner draws money out of the company to pay themself or when a corporation issues dividends to shareholders.

For our fictional chocolatiers, their equity may look like this:

Capital: $2,500
Retained Earnings: $5,450
Drawings: $-4,500
Total Equity: $3,450

Vertical Analysis

Vertical analysis of the balance sheet is another way to examine the balance sheet report. Vertical analysis is a method of examining a financial statement by calculating each line as a percentage of a predetermined base figure from the statement.

Vertical analysis, for example, can look at a specific line item on the balance sheet as a percentage of total assets.

Classified Balance Sheet

A classified balance sheet, in addition to a vertical analysis, is another way to parse your balance sheet. A classified balance sheet is a breakdown of each subcategory on your balance sheet, resulting in a more nuanced and valuable report. There are no specific or standardized subcategory groupings. Instead, your financial management team can determine which classifications are appropriate for your short- and long-term objectives.