The balance sheet is the financial state of a company at a given time. In order to reflect this state, the balance sheet shows the assets (what the organization owns), the liabilities (its debts) and the difference between them (the net worth).
Short for BS by AbbreviationFinder, the balance sheet, therefore, is a kind of photograph that portrays the accounting situation of the company on a certain date. Thanks to this document, the entrepreneur accesses vital information about his business, such as the availability of money and the status of his debts.
The assets of the company are made up of the money it has in cash and banks, accounts receivable, raw materials, machines, vehicles, buildings and land.
In the case of assets we have to underline that these are usually classified into three clearly defined types:
Current assets. Among them are those elements that are capable of being easily converted into cash. Hence, within this typology are the money that is in the bank and that which is available in the company itself, the accounts that remain receivable from customers, the checks that must be collected and what are the inventoried goods (materials raw, finished products, products in process of elaboration…).
Fixed assets. Under this denomination they include all the real estate and personal property that the company in question has and that are basic for the performance of its activity. Thus, examples of assets of this type are vehicles, furniture, land, buildings, or machinery, among others. It is important to know that these assets are subject to what is known by the name of depreciation, that is, to the wear and tear they suffer from use.
Other assets. This classification includes assets that do not belong to either of the two categories mentioned above. Examples of those would be expenses that are paid in advance.
Liabilities, on the other hand, are made up of debts, bank obligations and taxes payable, among other issues.
In the case of liabilities, these can also be classified into three categories:
Long term passives. They are those that the company must pay within a period of more than one year.
Current liabilities. They are those that the industry must pay in less than one year: benefits, overdrafts, credits…
Other passives. They are those that are not included in either of the two previous classifications.
It should be noted that the balance sheet is also known as the statement of financial position. The document usually has different columns, which organize the values according to whether they are assets or liabilities. The difference between these is the net worth, that is, the difference between what the company has and what it owes.
Beyond the fact that balance sheets are useful for business owners, their preparation is usually carried out by accounting specialists. The accountants are in charge of analyzing the numbers and turning them over to the balance sheet. Once the balance sheet is closed, it is presented to the entrepreneur or the relevant manager, who will make the corresponding decisions for the management of the company.
