Meaning of Balance Sheet

A balance sheet has to be drawn up in the accounting department of companies on a certain key date . It is a bilateral calculation that shows assets on one side and capital on the other. On the left side of the balance sheet are the assets as information about the use of funds and on the right side the liabilities as evidence of the source of funds. Assets reflect the assets, the liabilities represent the claims of the creditors as outside capital and the claims of the company to the assets as equity. Between assets and capital there must be balance sheet equality, the value of the assets must correspond to the value of the liabilities. The balance sheet enables the arithmetical but not the material allocation between the individual assets and capital parts.

What is a balance sheet?

The balance sheet or accounting shows an overview of all assets of a company as well as the origin of the capital. The structure of the balance sheet is the main component of double-entry bookkeeping.

Tasks of the balance sheet

According to Dictionaryforall, a balance sheet can be drawn up on different occasions, but it always has to fulfill three tasks. It must enable the content of assets and capital to be determined if the accounting is based on the merits. The balance sheet has a documentation function and provides information about the company’s assets. It forms the formal end of accounting . In terms of amount, the balance sheet must ensure an assessment of assets and debt. It is used to determine profit and enables the equity at the beginning of the financial year to be compared with the end of the financial year, taking into account contributions and withdrawals. Via the income statement, the occurrence of profit and loss is proven. A balance sheet must show assets and capital; it is usually kept in the form of an account. The assets side represents the debit side of the account, the liabilities side represents the credit side of an account. The balance sheet is drawn up on a key date, in contrast to the income statement, which is drawn up for a period of time. The balance sheet shows the economic development of companies over time by making the closing balances of various asset and liability accounts visible. The accounting serves to compare business assets. It fulfills an information function and enables the company to control its company. It is an information tool for creditors, potential lenders and the public sector.

Types of balance sheets

A distinction is made between different types of balance sheet:

  • Current balance sheets: They are drawn up at the end of a financial year. Listed companies must also prepare interim reports as weekly, monthly and quarterly reports.
  • Special balance sheets: They represent extraordinary balance sheets that serve as a basis for decision-making or are required by law at certain times. Such balance sheets are created as establishment balance sheets, liquidation balance sheets, dispute balance sheets and restructuring balance sheets.
  • Trade balances : Companies are required to prepare trade and tax balances. A trade balance provides information about the actual situation in the company. The tax balance sheet is used to determine the profit for income taxation and to depict company assets.
  • Individual balance. Depending on the number of companies reporting, a distinction is made between the individual balance sheet as part of the annual financial statements and the consolidation of the consolidated balance sheet as part of the consolidated financial statements. In the consolidated balance sheet, mutual obligations within the group can be eliminated by consolidating assets and liabilities.
  • Opening balance . At the beginning of his trade, the merchant must create an opening balance sheet that shows the ratio of assets and debts.

Structure of the balance sheet

The balance sheet is two-sided, it is divided into assets and liabilities. The assets on the left represent the use of funds in the company. They show what claims the company has acquired with the funds available. On the assets side of the balance sheet, funds such as cash register and bank accounts, means of production in the form of machines and real estate, materials and finished products can be represented. Intangible goods that are not always financially measurable must also be listed on the assets side. The value of such goods must be estimated. The assets side depicts the asset structure of a company. The liabilities side of the balance sheet shows the origin of the funds. It provides information on how the funds with which the company operates were financed. Equity is not subject to any repayment claim to third parties. It includes share and share capital as well as self-generated reserves and retained earnings. Borrowed capital represents funds made available by third parties for a limited period of time, which can be bonds, loans, bonds, but also commercial loans in the form of liabilities. A balance sheet total is formed on both sides of the balance sheet; the sums on both sides must be the same.

Balance sheet template

With a balance sheet template you can easily fill in the income and expenses. This not only saves you time, but you can also be sure that all mandatory information is included. You can find numerous templates for Excel or Word to download on the Internet.

Balance Sheet