Ideally, we should control our personal savings by comparing what we earn and what we spend. Since businesses have a lot of revenue and expenditure, they have an even greater need to organize this economic management effectively. In this way, they can know “in real time” what they have and what they owe to other companies. To do this, they use a balance sheet, which we will define here.
Definition and characteristics of the balance sheet
The balance sheet is a document that reflects the accounting situation and the distribution of corporate assets: it shows what it has and what it owes.
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It is the most important balance sheet of all, since it allows, at a glance, to know the economic situation of the company, as well as other important elements such as what it owes or the Amount of cash it owns.
In itself, this document does not show the company’s situation over a period of time, but it shows the concrete economic situation of the company at some point. This makes it possible to compare these balance sheets with annual balance sheets to find out how the situation of the company has evolved.
It must be updated at least once a year and, since it is a public document, you can view all the company’s balance sheets you want. This is important for people who wish to potentially invest in these companies.
Structure of the balance sheet
The balance sheet has a fixed structure, which is divided between:
Assets: left on a balance sheet, you will find cash, investments, and assets that belong to the business. For more information, we recommend that you consult our article what is Assets and Liabilities in Accounting.
Stable resources and current liabilities: they are on the right in the balance sheet. The stable resources are above and the circulating liabilities are below. The upper part includes all own funds (capital contributed by shareholders and own reserves) and the lower part includes all debts of the company.
It must be known that the sum of the two columns must give the same result; this proves that the balance is correct and that there are no problems.
Why is the result the same in both columns? The answer is based on the elementary concept that money cannot disappear. Indeed, all that is acquired with the help of loans must be invested in something, and all the money invested must come from somewhere.