Accounting – Introduction to Balance sheet

Accounting - Introduction to Balance sheet

Basically balance sheet of a company indicates its financial position at a specific date. The statement can be made for a corporation, partnership, individual or any entity (Also see Types of business structures in Malaysia) with debts and assets.

Balance sheets are part of the fundamental financial statements that companies prepare during every accounting cycle. They are also indicative of the solvency of the company (Also see The Common Accounting Challenges SMEs Need to Deal With).

The guidelines for a standard balance sheet are set by the International Board for Accounting Standards and by the organizations and companies specific to a country.

Why does a company need balance sheets?

The balance sheets are made to give a proper financial picture of a company at any given time to the owners as well as interested parties like lenders. To report the amounts, it is necessary for maintaining a record keeping process for finances, which would provide the balances in a particular time frame like a week, day, fortnight, etc.

What does a balance sheet have?

There are three main sections in a general balance sheet. They include:

    • Owner or stockholder’s Equity: This refers to the interest of ownership in the company and should equal the value received by subtracting liabilities from the assets.
    • Liabilities: This refers to debt, interest payments, mortgages or any amount the company owes
  • Assets: This includes the entire resources of a business, which is inclusive of accounts receivable, notes and cash.

The name balance is given to the sheet as it has to balance the accounts by removing the liabilities from assets to equal the equity of the owner.

Balance sheet categories

Two categories are present in balance sheets:

    • Classified
  • Unclassified

Classified: This has all three key categories including liabilities, assets and owner equity. It breaks down the categories into more detailed information to give a clear picture of the company’s strength and profitability when used in conjunction with income statements and cash flow statements.

Unclassified: This denotes the three main categories with Assets being listed initially. The items are listed as per their liquidity status such as cash present is listed first followed by the accounts receivable.

Liabilities are listed subsequent to assets.

The equity shows the difference between the liabilities and assets and it should equal the amount calculated by subtracting liabilities from assets. This is estimated as residual or proprietary. In residual equity, dividends given to the preferred shareholders are subtracted from the net income prior to assessing the dividend for a share of the residual equity holders.

Balance sheets are for internal and external use and are good indicators of the financial obligation status of a company. They help to assess the growth, liquidity status, and share value for investors as well as the business owners. We provide accurate and timely accounting for businesses to ensure they stay on top of the crucial operations and maintain smooth performance. Contact us for more information on our accounting firm in Johor Bahru.

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