Balance Sheets – Why do Accountants and Banks ask for them?
A Balance Sheet provides a good overall picture of the financial health of a business. It is a tool used by Accountants and Banks to evaluate a business’s liquidity. A Balance Sheet will allow a small business owner to identify trends and easily grasp the financial strength and possibilities of their business.
What does your balance sheet look like?
When in business, you will be sometimes asked by your bank manager to supply a set of Financial Statements. The Financial Statements they would most likely request includes a profit and loss statement for a set period and a balance sheet as of a certain date.
A balance sheet helps accountants and banks to:
- Identify the financial strengths of your business
- Understand the capabilities of your business
- Review the level of asset, debt and working capital of the business
- Compare the increase or decrease in the value of the business over a period of time
- See the relative liquidity of the business
- Evaluate your ability to pay all short and long term debts when they are due
- Analyse the composition of assests and liabilities, the relative proportions of debt and equity financing and the amount of retained earnings.
The following are the three main sections of a balance sheet:
- Assets – items or resources that the business needs to use to operate. Items such as work stations and a phone system. “What you own”
- Liabilities – are the financial obligations and/or debts of the business. A Liability could be the bank overdraft or tax liabilities “What you owe”
- Owners Equity – equals the difference between the assets and liabilities. Equity is what belongs to the owner once all financial debts have been paid.
Assets and liabilities are either current or non-current.
Current are things of value that are likely to be converted to cash or paid within the next twelve months. An example of current items could be stock that is regularly turned over. Non-current items are not expected to be consumed or converted into cash within the next twelve months. An example of a non-current item could be a mortgage on a building.
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