Balance Sheet

What is a Balance Sheet?

A balance sheet is a list of an organization's assets, liabilities, and capital as of a specific date. It demonstrates what a business owns and owes, in essence. It also displays the amount of money invested in the company. Calculating the profitability of the company, liquidity, leverage, and efficiency together with other financial statements is helpful.

Assets are listed on one side of a balance sheet, while liabilities and capital are listed on the other. The odds are always on the sides.

The balance sheet is built on the underlying principle that assets equal liabilities plus equity.

The result is a split in the balance sheet into two parts. All the firm's assets are listed on the left side of the balance sheet. Obligations of the business and shareholder equity are listed on the balance sheet's right side.

Features of Balance Sheet

The following are a balance sheet's features:

• It is regarded as the last step in the creation of final accounts.
• Rather than being an account, it is a statement.
• It includes transactions that are mentioned on both the liability and asset sides. Assets are located on the left, and liabilities are located on the right.
• The two sides should always add up to an equal amount.
• The balance sheet outlines the finances of the company.
• It is created after the deal, with a profit and loss statement.

Components of a Balance sheet

The Balance Sheet is a snapshot of one day in a company's existence. It demonstrates how much a company owns (assets) and owes (liabilities) on that day. In other words, it is a snapshot of a certain day in a business's life. The business's net worth or equity is the sum of its assets less its liabilities as of that date.

Three items make up a company's balance sheet: assets, liabilities, and net worth or equity. Equivalent to a scale, the balance sheet. Before adding the company's net worth, assets, and liabilities (business debts) are typically out of balance on their own.

Assets - Liabilities = Net Worth or Equity

The two parts are as follows:

• Assets are any items that a business owns that have a monetary value. Depending on their liquidity, assets are further divided into current and non-current categories. Cash on hand, account receivables, and inventory are examples of current assets. Non-current assets, in contrast, do not have a lot of liquidity. Furthermore, they cannot be exchanged for cash within the following year.
• Liabilities are the debts owed by the business to its creditors. Liabilities have current liabilities and non-current liabilities, just like assets do. The commitments that the business must meet in the upcoming year are known as current liabilities. While long-term debt is a non-current liability.

Role of balance sheet in a loan approval

A balance sheet's main objective is to present a company's financial situation as of a specific date. The equity, assets, and liabilities of the business are shown in a snapshot for a given financial year. Understanding the company's growth, liabilities, and financial position can be gained by analyzing the three categories.

It is used by analysts to analyze a company's profitability, liquidity, leverage, and operational effectiveness. Additionally, the analysis of the company's financials is aided by the profit and loss statement.

Hence while seeking a loan a balance sheet can help:

• To comprehend a company's financial situation.
• Stakeholders can examine the balance sheet to gain insight into the company's financial situation and operational performance.
• Calculating the company's growth involves comparing balance sheets over time.
• Understanding a company's capacity to take on expansion projects and unexpected expense areas by analyzing its balance sheet.
• It assists in determining the source of a company's funding, such as equity or debt funding.