Balance Sheet: What It Is, What Its Structure Is and How To Calculate It

Probably, you have met the term as significant in the balance sheet if you own a company or were once a leader. This is one of the most essential tools of financial management with regard to the organization since it helps to list and estimate the assets and liabilities of the company.

This simply means that a balance sheet draws the spotlight on assets, profits, and debts, which gives a unique and rich overview of the accounting situation with regard to the organization.

The balance sheet is actually considered an important piece of information that portrays the balance of the health of an organization while monitoring its current financial position, though at times it might be viewed as bureaucratic by some accounting professionals. Instead of simply being an accounting requirement, the statement is a vital governing document that guides the strategic decisions and drives in investing practices that cause growth in an organization.

Analyzing the balance sheet in great detail allows them to get some very precious knowledge on the financial situation of the company, determining robust assets, consistent profits, and, just as important, well-administered debts.

A very sound understanding would not only make financial governance stronger but can be a good basis for making the right decisions too.

Want to learn more and prepare a balance sheet? Keep reading, as we will provide a comprehensive explanation of what a balance sheet is, how to perform the calculations, and ways to simplify this essential process for your business.

Happy reading!

What is a Balance Sheet?

As has been discussed above, the main intention of the balance sheet, also known as the accounting balance sheet, is to exercise full control over the firm’s assets and rights. It further allows one to identify the sources of funds and investments available.

Unlike cash flow control, the balance sheet provides a snapshot of the general situation of the company: it offers an in-depth survey of the business situation at given points in time. That is to say, it provides a deep and integrated consideration of the financial state of an organization.

Unlike being necessarily concerned with cash inflows and outflows, the balance sheet categorizes and values assets, liabilities, and equity, and from this proper analysis, you can get an integral knowledge of the financial condition of a firm.

That is to say, the balance sheet is not merely an accounting formalism but, rather, a strategic tool to help the company’s managers and leaders comprehend, plan, and optimize resources in support of the realization of the firm’s financial and growth objectives.

What is The Purpose and Importance of The Balance Sheet?

In addition to being essential for financial management, the balance sheet is provided for in the Civil Code for most companies, helping leaders understand the real value of the organization and ensuring better conditions for managing the business.

However, anyone who thinks that the balance sheet is just an indicator of the organization’s financial health is mistaken. In addition, the document assists and provides the basis for calculating the returns obtained from investments, as well as the capital structure.

Among the main objectives of the balance sheet are:

• Assessment of the company’s financial performance;
• Guidance for targeted decision-making;
• Development of data-driven action plans;
• Efficient tax identification and planning;
• Use as an escape valve in challenging financial situations.

In short, the balance sheet is like a financial map of the company. It helps to understand how money is being used, guides important decisions, supports action plans, assists in tax management and serves as a valuable resource in times of financial difficulty.

What is The Structure of The Balance Sheet?

It is crucial to understand the structure of the balance sheet to avoid mistakes when preparing it. The report generally follows a pattern that includes the start and end date, details about assets and liabilities, and equity.

Want to understand this structure better? Then pay attention to the explanations below.

To understand the structure of the balance sheet, the first step is to understand the fundamental division between:

• The assets (what the company owns);
• Liabilities (what you owe);
• Net worth (what is actually hers).

This simple distinction facilitates efficient analysis of the company’s financial state.

Assets

Assets: anything the company owns, such as goods, resources, and cash. Depending on the activity, this can also be machinery, equipment, even software. In other words, everything that can be invested in monetary income is an asset.

There are two basic concepts for assets:

Current Assets

Resource that the company can convert into cash in the very short term. These include cash on hand, accounts receivable, and inventory.

Non-current Assets

It covers assets of greater value and long-term liquidity, such as real estate, land and vehicles.

Knowing which of the two encompasses how much the company has on hand immediately rather than long-term means knowing how much it will have available currently versus its investments.

Liabilities

Whereas liabilities pertain to the debts and other financial liabilities of the company. It pertains to loans or regular expenses in the form of employee salaries, taxes, utilities, among others. Essentially, liabilities are obligations that lessen the equity of an organization.

Therefore, when liabilities are on the rise, then the market value of the company will decrease. Such a relation stresses the necessity to be responsible for liabilities and to maintain and maximize total company value.

Current Liabilities

Refers to all debts with a maturity date equal to or less than one year, covering commitments such as labor obligations, taxes, amounts owed to suppliers, and loans with monthly payments, among others.

Categorization as current liabilities highlights the short-term nature of these financial obligations.

Non-current Liabilities

Like non-current assets, non-current liabilities are obligations with maturities greater than one year, those long-term debts, such as provisioned credits, financing, debentures, among others.

Net Worth

Net worth is everything the company has in terms of capital, that is, the calculation of assets and liabilities to arrive at the value that the company actually has. The sum of all resources, investments, reserves, share capital, among others.

This way, the company will have a clear view of its available capital. This not only helps in identifying financial ratios, but also in presenting returns to shareholders and partners, including reserves and accounting adjustments, providing a solid basis for the sustainable expansion of the business.

Balance sheet analysis reveals whether a company operates in a “positive” or “negative” scenario, offering crucial insights into its financial situation.

Understanding this concept allows proactive actions to be taken to reverse possible unfavorable scenarios, preserving and strengthening the company’s financial health.