Financial Reports - understanding the Balance Sheet

 

The Balance Sheet is the accounting report that reflects the economic and financial situation of a company at a given time. That is, it's a “still photo” of the situation of the company, which allows us to analyse the state of the company and make decisions accordingly.

It is also possible that the balance is generated by comparing it with the same date of the previous year, in order to recognize possible changes in the company’s behaviour.

The balance sheet is structured in two blocks; Assets and Liabilities.

Does your balance sheet balance?

The fundamental principle of the balance sheet is that the assets, liabilities and equity must balance, that is, the balance sheet must balance. If not, you must review the accounting, as it is certain that we will have been a misposting.

There is another possibility by which a balance may not balance. When we perform accounting in a computer program, this usually allows us to create accounting codes and select whether the account you’re creating is a balance sheet account or a profit and loss account.

However, when the accounting program generates the balance sheet report, they do so by including only the accounting codes that when created have the balance sheet as the type selected. So, if your balance sheet doesn’t balance and you’ve recently added new accounts to this for example a new bank account it’s a good place to start and check that they have been created correctly.

In the case of Reviso when both the Balance Sheet and the Profit and Loss Report are being generated and the program detects how many account codes are outside the chart of accounts, a notice is provided detailing this.

Balance sheet items are grouped and sorted according to fixed criteria that facilitate their interpretation. For example, bank accounts are given the account type of Balance Sheet and the Account Category of Bank and cash balances.

Assets

The asset is placed according to its liquidity, that is, the ease with which it can be converted into money. It is in turn divided into Current and Non-Current Assets.

The order is from lowest to highest liquidity, the first items being the fixed assets and the last the money deposited in the bank (the most liquid there may be).

Net Assets over Liabilities

The Net Assets and Liabilities are sorted according to their enforceability, from lowest to highest. Following this criteria, the Net Equity, which contains the Own Funds (Capital, reserves, …) the least enforceable elements of the company, that is, they are the last resort that would be used to address debts to third parties.

Then there would be the Liabilities, also ordered from least to highest enforceability. The most demanding elements would be debts with authorities such as VAT and tax then suppliers that are usually very short term.

When the businesses assets are more than the liabilities the business is classed as solvent, when the liabilities are greater than the assets then this is not a good place to be and the business would not be in a position to pay their creditors.