Balance Sheet gives different stakeholders useful information about the financial status of a business. Mainly, what the business owns and how did the business pay for it. A business can pay for what it owns either using its own money or using borrowed money.
If a company owns a building worth USD$1,000,000, in order to pay for it, the firm either borrowed money by taking a mortgage or used its own resources to pay for that building.
Balance Sheet shows the financial position of a business at one day only – usually the last day of the quarter or the year.
Because Balance Sheet is only a snapshot of a business’s financial position at one specific point in time (the date of the particular Balance Sheet), the individual numbers in Balance Sheet can change a lot in a short space of time. For example, next quarter or next year when a new Balance Sheet will be constructed.
Why is Balance Sheet important to business stakeholders?
Balance Sheet, or Statement of Financial Position, records the values of a business’s assets, liabilities and the Net Wealth (Shareholders’ Equity). In any company this Net Wealth belongs to the owners (shareholders).
In fact, every Balance Sheets must contain three essential parts: assets, and liabilities plus equity.
- ASSETS. The items of monetary value that are owned by the business and everything what the business is owed by others.
- LIABILITIES. All financial obligations which the business owes to others that are required to be paid in the future either short-term or long-term.
- EQUITY. Shows the capital invested by the owners and how much wealth has the business generated from its operations.
The aim of most businesses is to increase Shareholders’ Equity to make the business wealthier. It will happen when the value of the business’s assets increases more than any increase in the value of liabilities. Shareholders’ Equity equals to total value of assets minus total value of liabilities. Raising the value of assets can be done by either using the business’s own resources or using borrowed money.
What is Shareholder’s Equity?
Shareholders’ Equity shows the firm’s sources of finance. Equity comes from two main sources:
- Share Capital. This capital is originally invested in the company through the purchase of shares. It also includes the total value of capital raised from new shareholders by issuing new shares.
- Retained Profit. The retained earnings of the company are accumulated over time in from its main business operations in the past years. The amount of Retained Profit can be found in Profit and Loss Account (P&L Account).
As one of the final accounts which all incorporated businesses must prepare, Balance Sheet must be produced for auditing purposes. Hence, Balance Sheet helps to ensure that all the money used for business transactions within the organization are properly accounted for.
