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What is the definition of balance sheet?

What is a balance sheet?

The definition of the stability sheet suggests that it is a monetary declaration that suggests the company's assets, liabilities, and shareholders' fairness at a particular time, and it also affords a groundwork for calculating fees of return and evaluating the capital structure, as it is used with different vital monetary statements, such as: the profits declaration and the announcement of  cash flows in order to perform the analysis Basic or calculating financial ratios, and the balance sheet displays the company’s financial position at the end of a specific date, as it shows the company’s financial position at one moment in time, and enables a view of what the company owns, and the debts it must pay.
What is the definition of balance sheet?
What is the definition of balance sheet?

The definition of the balance sheet includes determining the final balances in the assets, liabilities, and equity accounts of a company as of the date mentioned in the report. By creditors and lenders, to determine whether they should extend credit to the business or possibly withdraw existing credit, these metrics include:
  • Accounts receivable collection period.
  • current ratio.
  • Debt to equity ratio.
  • Inventory turnover.
  • Return on net assets.
  • Working capital turnover.
The balance sheet is also defined as one of four basic accounting financial statements, the other three being: the income statement, the status of equity, and the statement of cash flows. , assets are listed separately, then liabilities and equity are listed together in second place, and the balance sheet can be presented in two different formats: account format and report format, where the account format goes from right to left where assets are on the right and liabilities and equity are on the right, and The report is formatted vertically with assets at the top and liabilities and equity at the bottom.

How do you calculate the balance sheet?

A basic understanding of the basics of using financial statements helps to conduct financial analysis of the data, which includes the definition of the balance sheet, the income statement and cash flows. It is received and can be measured objectively.

Whereas liabilities are what the company owes to others and must be paid under certain terms and time, company stock represents profits and the retained money made by its shareholders, who accept the uncertainty that comes with the risk of ownership in exchange for what they hope will be a return well over the planned investment, and the relationship of these elements is expressed in the basic budget equation:
Assets = Liabilities + Equity.

What are the objectives of the balance sheet?

The objectives of the balance sheet include understanding the company’s financial position at a specific time, as it shows the company’s assets and liabilities, as well as the amount invested in the company, which is equity, and this facts is extra treasured when the budgets of numerous consecutive durations are grouped together, so that it can be seen On the company's trends in various items, and the most important objectives of the balance sheet are the following:
  • Understand the short-term financial position of the organization.
  • Compare the total amount of debt with the total amount of equity budgeted.
  • Examine the amount of cash in the budget to see if there is enough money to pay the dividend.
  • See if there are any assets that can be divested without harming the core business.
  • Identify and disclose the financial position of the institution.

What are the components of a balance sheet?

The definition of the balance sheet reflects a snapshot that represents the state of the company’s financial resources at a time, but not for long periods, as the budget must be compared during different periods, and a number of ratios can be obtained from the balance sheet, which helps investors understand the health of the company, and includes the definition of The balance sheet is an illustration of some ratios, such as the debt-to-equity ratio. While the income statement and cash flow statement also provide valuable context for assessing a company's financial position, the balance sheet is one of the three; Income statement and cash flow statement, which reflect the basic financial statements used to evaluate a business, so the definition of a balance sheet includes calculating the following financial ratios:

1- assets

The accounts are listed from top to bottom in order of the bank's liquidity i.e. ease of converting into cash, and it is divided into current assets, which can be converted into cash in one year or less; and intangible assets that cannot be converted into cash, and the following is the general arrangement of accounts within assets:
  • Short-term assets: Short-term assets can be clarified through the following points:
  1. Cash: and money equivalents are the most liquid assets, and can include: Treasury payments and momentary certificates of deposit, as properly as tough currency.
  2. Negotiable securities: These are equity and debt securities that have a liquid market.
  3. Accounts Receivable: This refers to the money that customers owe to the company.
  4. Inventory: Goods available for sale, valued at the lowest cost or market price.
  5. Prepaid Expenses: This represents the amount already paid, such as insurance, advertising contracts, or rent.
  • Long-term assets: As for long-term assets, a brief summary of them can be mentioned through the following points:
  1. Long-term investments: These investments are securities that will not or cannot be liquidated in the next year.
  2. Fixed assets: These assets include land, machinery, equipment, buildings and other durable assets.
  3. Intangible assets: such as; Intellectual property and so-called trademarks.

2- commitments

The definition of the balance sheet includes liabilities, which are money that a company owes to outside parties, from the bills it has to pay to suppliers to the interest on bonds it issued to creditors for rent, utilities, and salaries. Long-term liabilities are due at any time after one year. The liability calculation includes the following:
  • Current Liabilities:
  1. The rolling portion of long-term debt. Bank indebtedness.
  2. interest payable.
  3. payable wages.
  4. Advance payments to customers.
  5. Dividends payable and others.
  6. Earned and unearned premiums.
  7. Payable accounts.
  • Non-current liabilities:
  1. long-term debt.
  2. Deferred tax liability.
  3. retirement fund commitment.

3- Property rights

The definition of a balance sheet includes equity, which is money owned by business owners; That is, its shareholders, and it is also known as net assets, because it is equal to the total assets of the company minus its liabilities, i.e. debt owed by non-shareholders. Equity includes:
  • Retained earnings.
  • Treasury stocks.
  • Preferred shares.

What are the types of balance sheet?

The definition of the balance sheet includes an individual's assets, equity, and obligations at a particular time in different types of balance sheets, where individuals and small companies tend to have simple budgets, while large companies tend to have more complex budgets, and they are presented in the annual report of the organization, and from the types of budget General is the following:

1- Personal balance sheet

The definition of a personal balance sheet includes current assets, such as: cash in checking and savings accounts, long-term assets, such as: common stocks and real estate, current liabilities, such as loan debts, outstanding mortgage debt, and long-term liabilities, such as mortgages and other debts, Securities and real estate values ​​are listed at market value, which is the difference between an individual's total assets and total liabilities.

2- Small Business Balance Sheet

The definition of a small business balance sheet includes current assets, such as: cash, accounts receivable, and inventory, fixed assets such as: land, buildings, and equipment, intangible assets such as: patents, and liabilities such as: accounts payable, accrued expenses, and long-term debts, and contingent liabilities are recorded such as: Collateral is in the footnotes of the balance sheet, and the equity of a small business shows the difference between total assets and total liabilities.

How is the balance sheet prepared?

The definition of the balance sheet emphasizes that it is an important document that provides information to the lender, who is looking for specific information about the company to use in obtaining a start-up loan. When starting a business and applying for a start-up loan, many specific financial statements are requested; Including the statement of profit and loss, cash flow or sources and uses of the statement of funds, the balance sheet, and for a business start-up without a date, the balance sheet includes its presentation of the company's financial position as of the start-up date, including what actually happened in the current stage of the startup And what will happen before the date of starting the business, so there are several steps to prepare the balance sheet as follows:
  • Organize the balance sheet in two parts; The first section lists all of the company's assets, and the second section lists the company's liabilities and equity.
  • List the value of all assets in the business as of the start-up date; This includes cash, equipment, vehicles, supplies, inventory, prepaid items, and the value of owned buildings or land.
  • List all liabilities including business credit cards, any loans to the company on startup, and any amounts owed to vendors on start-up.

What are the types of balance sheet format?

The balance sheet is defined as the part of the financial statements issued by the company. It informs the reader of the amounts of assets, liabilities, and equity held by the entity as of the date of the balance sheet. There are several balance sheet formats available as follows:
  • Classified Balance Sheet: This format provides information about an entity's assets, liabilities, and shareholders' equity, which are grouped or categorized into account subcategories, and is the most common type of balance sheet format.
  • Common Size Balance Sheet: This structure shows now not only the widespread facts in the stability sheet, however additionally the column that shows the equal records as a proportion of complete assets or as a percentage of total liabilities and equity.
  • Balance Sheet for Comparison: This format provides information about the assets, liabilities, and equity of the entity as of multiple points in time that the balance sheet can present for comparison at the end of each year for the past three years.
  • Vertical Balance Sheet: The balance sheet displays one column of numbers, starting with assets line items, followed by liabilities line items, and ending with shareholders' equity line items.

What are the determinants of the balance sheet?

The definition of the balance sheet includes various determinants, and the following are the most prominent determinants of the balance sheet:
  • Only acquired assets can be included in transactions: This is why sometimes the most valuable assets of a company are not included in the balance sheet, for example highly talented designers, content writers used by an internet trading company cannot be reported as assets on the company's balance sheet.
  • Determining restrictions on the company’s long-term assets: whose value increases since the time of its purchase, for example: the company’s land will be reported at an amount no more than its cost, while its buildings will be reported at cost minus the accumulated depreciation, so the amounts in the balance sheet of the company’s land and buildings can be well below its market value.

How can the balance sheet be improved?

The definition of the balance sheet includes more than ratios to prime numbers, where financial assets consist of several important factors, despite the importance of each of these elements, they are not necessarily equal, some assets have the ability to generate income, but the individual circumstances surrounding them reduce Realistic value, as these factors make up the financial assets listed on the company's balance sheet.

In order to work on improving the balance sheet, it is necessary to monitor working capital, which reflects the company’s ability to use funds to generate more income in the future, and attention must be paid to cash flows, as keeping a reserve amount of cash necessary for immediate spending is a positive feature of an institution with a positive cash flow Methods for improvement include:
  • Reduce Liabilities and Liabilities: Because the balance sheet compares the debt-to-asset ratio, by eliminating liabilities and liabilities, the balance sheet will automatically improve.
  • Periodic inventory count: Although inventory may be an asset to the company, storing surplus for long periods can be costly, so the surplus should be disposed of to reduce expenses.
  • Reviewing the company's assets: by selling assets that do not achieve the expected profit.
  • Balancing the cash flow: By cutting expenses or bringing in more money which will create better cash flows and a stronger balance sheet.
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