The basics of balance sheet and its importance

Irrespective of the size of the company, the balance sheet is a must for any sort of organization. At the end of the financial year the organization has to produce its audited balance sheet. In fact the balance sheet is a systematic financial presentation of the total asset and the liabilities of the company. The common format of the balance sheet remains same for all the organization and it is prepared based on the same principal. It has to be kept in mind the balance sheet is to be produced on specific time and it may be monthly, quarterly and annually. Generally companies prefer to produce the balance sheet annually.

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Balance Sheet

Components of balance sheet:
Asset:
The asset is the one which the company has it with them. In fact the asset is again categorized into 2 types i.e current asset and long term asset. From the name it is explanatory the current assets are those which can be converted into cold hare cash. As far as liquidity is concerned the current assets are very easy to liquidate where as long term assets can’t be liquidated easily. In a business and sort of organization the current assets includes cash, accounts receivable and inventory which are easy to liquidate. Similarly the long term asserts are Property, plants, and equipment which the company can’t move from plant to plant every year and time to time. In fact all the investment and the goodwill will also comes under the purview of the long term asset.

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Liabilities: The simple definition of liabilities is what the company or the organization owes to others. Loans, bonds issued, accounts payable and some others are the common examples which will reflects on the liabilities side of the balance sheet. While preparing the annual balance sheet each and every organization will make their best effort to make the liabilities column into a smaller one.

Like the asset, the liabilities are also categorized into two types as current liabilities and the long term liabilities. The current liabilities are the one which the company can repay the liabilities in a shorter period of time. Whereas for the repayment of the long term liabilities the company takes a bit longer time compare to the current one.

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Importance of the balance sheet:
A balance sheet is extremely important for any organization. The balance sheet reflects the exact financial position of your business. As you will get the clear picture of your financial position, you can plan for the future course action for your business.

Balance Sheet

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In deciding the short term goal and the long term goal, you will get some vital clue form your balance sheet. Analyzing the balance sheet and the profitability quotient for your business, you can decide your goal. In fact you can make a perfect prediction of growth for your business.

The balance sheet will reflect the positive side as well as the negative side for your business. You can focus more on the positive side and can take necessary corrective measures for the negative aspects. Analyze the balance sheet and make a plan for the future.