Any business owner will tell you that creating a balance sheet is not only helpful but necessary. This is to show you where your profits are and any financial losses and its reasons. Not only does a balance sheet help you with all these, it is also important to know which balance sheet you should be using before creating one. As we know that there are a lot of types of balance sheets and their uses and purposes for different types of businesses. Being able to know which one to use is also useful as to not have to waste your time wondering which is which. Have you also asked yourself why a balance sheet is necessary apart from what is mentioned above? Business owners who have all the experience in their belts would be able to tell you about it, but what about those who are still starting out? You must of course know why a balance sheet is important and what kind of balance sheet to use. For this article, we are going to be talking about balance sheets, their purpose, uses, importance and their kinds. So let’s take the plunge and read on right now.
What is a balance sheet? So to start the discussion, a balance sheet also known as the statement of financial position is simply one of the most necessary materials. In the business world, a balance sheet is considered one of the most important things to have when starting out a business or for your company. It is a document that shows the summary of your company’s finance from the assets, the liabilities and if you have any stockholders in your company, it also shows there. The balance sheet consists of the important information all being broken down to show where your money is going and what it was being used for.
Moving along, now that we know what a balance sheet is, it’s time we know the different types of balance sheet forms. As we know that a balance sheet is a document, but did you know that there are several types of forms when you plan on making a balance sheet? Here are the most common types of balance sheet forms below.
So the first on our list is the vertical balance sheet form. The format for this type of balance sheet shows one column of numbers, which in order starts with your assets and every single information that falls under your asset, like cash and stock of goods that your business sells. Of course in every business, what may be in the asset would differ. This is just a few examples to give you a good picture of what assets may be. The next one following the assets would be the liability, followed by the shareholders in your company’s equity. So in a single column, you will find three main categories, all presented neatly and in order. It is easier to do it this way so that when it is time to liquidate everything is in order. Note, when you do place all the information under all three categories, place them in order of when they happened. Not by alphabetical order.
The second on our list is the common size balance sheet form. Now you may think because of the title, it would sound more like not too large nor too minuscule, rather simply just right. Let’s find out shall we? So a common size balance sheet form is a type of balance sheet that shows the usual or the most common of information that can be found in the balance sheet form. In a way it is called a common size balance sheet form because it has all the expected information that can be found in a balance sheet form, and some. For this type of balance sheet form, it shows the percentage of the total asset, the percentage of the total liability and of course the percentage of the total equity of the shareholders in your company or business. This type of sheet form is best used when you want to see the changes of numbers and sizes in your accounts.
Next on the list is Comparative Balance Sheet Form. From the name of the sheet form you may have an idea as to what it can do or what is its purpose. If you state that the form shows side-by-side information, you are correct. Seeing as it means to compare, this type of balance sheet shows a comparison of two or more dates of the company or business’s assets, liabilities and shareholders’ equities. This also means that you need not simply have to compare two different years or months at a time, you may also be able to do more than that. Just to see how far of a difference the company or your business went. This is what most would use when they want to see the difference or the lack of it.
The last but not the least of forms is the classified balance sheet form. Now you may think that because it’s classified, it’s better than the other three types of forms we were discussing. To some business owners or companies who do use this type of sheet form, it may work for them but it does not necessarily mean it would work for others as well. Here is the reason why. It is considered a classified balance sheet form as the information being gathered i.e. assets, liabilities and the shareholders’ equity that may be too confidential or personal. However, this is still considered the most common of the other three as this does a better job at merging larger separate accounts compared to the ones above.
Let’s have a recap. We went on to discuss what a balance sheet is about, then we moved on to the types of balance sheet formats. We discussed the importance of a balance sheet and the uses. We also touched on what information is placed in the balance sheet. To keep the ball rolling, let’s discuss how to make an excellent balance sheet. This is necessary when you are starting out a business or when you want to see where the profit flows in your company. Let’s go.
Depending on which balance sheet format you are planning on using, the most important thing to always remember and place is the date and the year or years. Years if you are using the comparative balance sheet form for this. Placing the date of when you plan to liquidate is necessary, so when you start your balance sheet liquidation, start by the date and the necessary information that is required of your balance sheet. Another thing to remember is that when you place the information, they must be in order of the date they happened and not alphabetical order.
Now that you have your proper dates and years set up, it’s time for you to list all and yes I mean all your assets. List all of them according to their proper dates and the correct numbers. Once you have listed all of them down, the next step is to add all of them up. Once you have done so, it’s time to move on to the next step. That is to list and calculate all your liabilities.
The third tip is basically just the same as your second tip, except for this one, it’s your liabilities. List all the liabilities down either side by side with your assets or you may place them below. However you decide on doing this, as long as the most important parts are present. The total of your liabilities. As the formula for attaining everything is your assets should be equal to or at least balanced with your liabilities and your shareholders’ equity. To be able to know this, you must first add up everything before having to see if your assets are equal to your liability and equity. Skipping this step may result in lack of information necessary for your balance sheet to be completed.
Of course to be able to get the correct amount on your assets, you must also include in your computation the shareholders’ equity. Any information that is necessary for your balance sheet to be complete especially if it falls under this category must be added.
Last but not the least part of the tip is to check the entire total of your liability and equity. Make sure that the total of both categories should be the same or at least balanced out with your assets. If the total of your assets do not balance out the liability and the equity, you must check and recheck if you have miscalculated or have forgotten to add something from your liabilities or equity. Once you leave something out, the whole balance sheet must be done again or until everything is as it is.
A balance sheet is a document that shows the summary or the outline of the expenses, profits and the shareholders’ equity. A balance sheet is a useful tool for businesses and companies to be able to track the flow of their profits and their losses.
The different types of balance sheet forms are: Vertical balance sheet form, Comparative balance sheet form, Common Size balance sheet form, and Classified balance sheet form. There are several different types but these four are the most common and mostly used types of balance sheet forms.
The difference between a common size balance sheet and a comparative balance sheet is that, a comparative balance sheet lets you compare more than just two months or quarters or even years of your total assets, liabilities and shareholders’ equity. It gives you the opportunity to compare more than just a few months or years and to be able to see the growth. A common size balance sheet however, can only give you the current or the present percentages of the company or the business’s profits.
This is the end of the discussion. From defining what a balance sheet is to its types and tips. Now that we know what a balance sheet is and how important and useful it can be for a business or a company, it is also time for you to try it out on your own. May it simply be for practice or for the actual liquidating your profits, may this article give you the answers that you are looking for.