What is included on a balance sheet?
Balance sheets are an essential part of your business’s financial statements.
They communicate the financial value of your business in terms of assets (what you have) and liabilities (what you owe).
With what is included on a balance sheet, your shareholders and investors can understand the financial health of your company.
This means being able to compare assets and liabilities to determine liquidity and calculate the rate at which your organization generates returns.
Only publicly traded companies are legally required to produce balance sheets, but they’re useful for any business needing a clear overview of its financial status.
For example, they’ll show your company’s creditworthiness when applying for loans or looking for investors.
A great resource for structuring business-critical documents are expertly-made templates.
Resources like PandaDoc’s financial report presentation template show you the right layout and provide examples.
What is a balance sheet?
A balance sheet shows who owns a business, what liabilities it owes, and what assets it owns.
Alongside your income statement and cash flow statement, it’s one of three core documents used to evaluate a business’s financial position.
Balance sheets show your company’s financial status at a specific point in time and can be compared with other time periods to determine growth.
They need to be clear, well-structured, and accessible to non-professional investors and shareholders.
Assets in your balance sheet will be categorized alongside liabilities and shareholder equity.
What is the balance sheet formula in accounting?
Assets = Liabilities + Shareholder’s Equity is known as the Accounting Equation.
This states that your business’ total assets are equal to the sum of its liabilities plus its shareholder’s equity.
What does a balance sheet show?
Your balance sheet shows the health of your business through a calculation of your assets and liabilities.
Why is a balance sheet important? Because it provides the following key insights into your business:
Liquidity
A balance sheet shows your business’s liquidity by comparing current assets with current liabilities.
It’s important to note that your assets should always be greater than your liabilities and it’s wise to budget with a buffer between assets and liabilities to cover short-term unexpected financial obligations.
This is true for the balance sheet of a small business and large organization alike.
Efficiency
You can measure how efficiently your business uses its assets by comparing your balance sheet with your income statement.
This comparison also gives you a better idea of how your organization is using its assets to generate revenue.
Leverage
Financial leverage refers to the quantity of borrowed capital a company has invested in its assets.
A business balance sheet helps you compare debts and equity and tells you how much leverage your business has.
This alerts you to the financial risks you face and how much room is left for borrowing.
Fundamentally, the importance of a balance sheet can’t be overstated!
What exactly is included on a balance sheet?
So, what is in a balance sheet? It should comprise three columns: assets, liabilities, and equity:
Assets
Assets are all the items a company owns. They are classified based on convertibility, physical existence, and usage.
Convertibility
This describes how easily an asset can be converted into cash (made liquid). Once this is decided, assets are further classified as current or fixed.
Current and fixed assets
Current assets can be made liquid within a year, like short-term deposits and stock.
Fixed assets on the other hand cannot be readily converted. They’re usually things like machinery and property.
Physical existence
Physical existence describes whether an asset is tangible or intangible.
Tangible and intangible assets
Tangible assets are things you can see and touch.
These can be any type of goods, machinery, buildings, etc. Intangible assets have no physical existence. These can range from business copyrights and patents to brand trademarks.
Usage
Usage refers to the extent to which certain assets are necessary for daily operation. These are termed operating and non-operating.
Operating and non-operating assets
Operating assets are necessary for the conduct of business. These can be things like buildings and machinery.
Non-operating assets are the opposite. These are short-term investments that aren’t necessary for your daily operations.
Liabilities
Liabilities are everything your company owes. They are classified as current or non-current.
1. Current liabilities
These include obligations and debt that must be repaid within a year. They can also be short-term assets. On your balance sheet, these should also include short-term loans, accounts payable, and interest payable.
2. Non-current liabilities
These are debts that are due in more than a year. This can include deferred tax liabilities, bonds payable, and long-term notes payable.
Equity
Equity is the amount divided between shareholders once debts are repaid and assets liquidated.
Equity can be positive or negative based on whether a business has enough assets to cover its liabilities.
Typically, a balance sheet is arranged with assets on the left side, liabilities on the right and equity beside it.
Document automation software can streamline the process of creating balance sheets and other financial documents.
PandaDoc for finance can help you organize your business-critical documents. Custom templates can guide you through working with the likes of balance sheets and what to include.
What are the limitations of a balance sheet for a business?
While balance sheets are a crucial component of professional financial statements, they do have some drawbacks.
Most notably, they only show financial metrics from one point in time. You’ll need to compare balance sheets over time to identify performance trends.
They’re also susceptible to human error. The best way to avoid such human error is by creating as many business documents as possible with the help of automation and templates.
You might, for example, combine a financial planning presentation template with the workflow automation features of PandaDoc that provide activity tracking and keeps documents secure.
Evaluate your financial standing with a balance sheet
Balance sheets are necessary financial information summaries. They’re tools to measure your business health and, in conjunction with other tools, provide valuable forecasting metrics.
What is included on a balance sheet? Essentially, they’re all about your assets and liabilities.
Panadoc’s trusted templates can get you started with business documents. Then, you could schedule a 15-minute demo to find out more.