Balance sheet, or Statement of Financial Position, forms one of the financial statements (the others being Income Statement, Statement of Cash Flows, and Statement of Stockholders’ Equity with Notes accompanying them) that shows the position of business at one particular point of time its assets and liabilities as well as the capital. It gives the figures for assets including current and fixed assets, liabilities including current and fixed, and equity or the amount contributed by shareholders plus retained earnings (or losses, as the case may be).
Unlike income statement, another of financial statements, which shows the fiscal performance over a period of time, balance sheet, is a picture of one particular period of time. While both can be prepared for any duration (or for any time), normally they are made at the end of the financial year. It is obligatory to do so as decreed by legal requirements, including submission to tax authorities. Accounting standards also require that balance sheet is prepared that accurately reflects the financial position of the business.
The balance sheet is the last of the statements to be made; the steps in accounting after this are its interpretation by the management. While this alone does not suffice, information’s, ranging from the addition of (or reduction of) working capital – in case current assets is lower than current liabilities (or vice versa), knowing the net worth of the business, determining future sustainability, calculating dividends to be distributed to the shareholders. Employees can also be adjusted according to the decision generated.
It has other users in addition to tax authorities and the management; public as well as investors and creditors who have no other document to rely on, can assess the health of the business, its liquidity through its perusal. They can see whether the business can meet its obligations by what it owns. The issue of to or not to invest in the business can be solved with a look into it.
Of course, there are notes accompanying the financial statements. Moreover, these too should be consulted in case there are any financial information relevant to existing and prospective investors, as well as lenders, and other creditors to help decide about resources of the entity. Accounting applications help in making balance sheet. The process follows from the earlier stages of journal entries that are made, a ledger that is prepared and trial balance that is tallied. In all the stages, the accuracy of entry is ensured so that there is no hassle while preparing it. This also helps in reducing employees needed to prepare it, thus freeing the manpower to do other important issues.
Management can see the financial position of business without having to wait for the end of the financial year thanks to a feature in apps that can swiftly show the state of business at an instance of time with some giving option of the real-time balance sheet. Comparison of past years’ (or past period) record is also made easier when using applications.