TAX BASICS

What is a balance sheet and what are the components?

Have you heard of the term balance sheet? What does the word bring to our mind suddenly? Something that balances, as it is related to accounting it would be related to business. In accounting balance sheet is one of the most important financial statements. Accountants and businesses across the world use it to view their business position. Hence, it is also known as the statement of financial position.

The balance sheet presents a company’s financial position at the end of a specified date. Moreover, they provide a quick glance at how your company performed in the past years. It allows a banker or someone like a creditor to see what the company owns. This then allows them to determine whether to provide a credit or a loan. Apart from the mentioned, there are a few others who would be interested. If you are raising funds a potential investor would love it if you have a strong financial position. The government agencies also would like to know how your business is performing. Giving a clear idea about the business and ensure you don’t evade any tax illegally.

What are the components of a balance sheet?

Assets

                These are the things that a company owns and show the position of the company. A company with assets always has a strong position. Assets are the resources of a company that has been acquired. Moreover, they have future economic value that can be expressed in monetary terms. Prepaid expenses are also considered assets because you don’t need to pay those expenses in the future and they reduce your future liability. Usually, accounts will have debit balances. Assets include cash, accounts receivable, inventory, supplies, land and buildings, and many more depending upon the business. There are also intangible assets that cannot be seen but add value to the business like goodwill, patents, trademark, etc.

Liabilities

                If assets are the things owned by the company then liabilities are what a company owes. They are the obligations of a company and generally have the word payable in their account title. Liabilities also include amounts received in advance for future services. Some examples of liability include salaries payable, accounts payable, wages payable, etc. Liabilities generally have credit balances. A company’s commitments such as the signing of a contract are not recorded in a balance sheet unless some goods or services have been received. Liabilities are mainly classified as two different categories i.e current and long term. For example, a company has a loan the interest amount payable for the next 12 months is recorded as a current liability and the principal amount is recorded as a long term liability.

The balance sheet formula

For any organization assets and liabilities are the important factors that determine the position of a business and proper recording of the books plays a vital role in the success of the organization. There is also another basic formula of accounting that brings another term into the picture.

Assets – Liabilities = Owner’s Equity (Capital)

The owner’s equity is sometimes referred to as the book value of the company. Owner’s equity is used for a sole proprietorship when it is a company then it would be stockholder’s equity. The book value might not be always accurate because the trends change a lot and are not accurately predictable. A piece of office furniture purchased for £2000 has a book value of £1500 but is valued in the market for only £1250. Whereas the building purchased for £100,000 is valued in the book at £150,000 but the market value could be £300,000.

Along with this information, there is another vital information known as footnotes or notes to the balance sheet. The notes inform the readers about such things as significant accounting policies, commitments made by the company, and potential liabilities and potential losses. The notes contain information that is critical to properly understanding and analyzing a company’s financial statement. These are the important things which you have to consider while the preparation of the balance sheet. You want to save time and ensure it’s done properly. We understand that at times this is a bit too much in your busy day. At TaxTotal we have a group of accountants who are dedicated to making your life better. Feel free to book a free consultation with one of our accountants.

Sidharth Bharthan Menon
CEO, taxtotal​