Tax Question:
What is a Balance Sheet?
Facts:
A Balance Sheet is the part of the financial statements prepared for owners, investors, and bankers that summarizes the assets, liabilities, and the shareholder’s equity for a specific date in time, usually the year end.
Discussion:
The Balance Sheet is also referred to as a Statement of Financial Position. The Balance Sheet formula is comprised of the following elements:
Assets = Liabilities + Shareholder(s) Equity
The Balance Sheet must meet this formula meaning both sides of the equation are equal to each other, hence the name Balance Sheet.
One side of the Balance Sheet is Assets which are listed in order of liquidity such as cash, accounts receivable, and property, plant and equipment, etc. Most assets are tangible meaning they are physical in nature such as equipment and they can be assigned a monetary value.
Liabilities are on the other side of the Balance Sheet and are comprised of the money your corporation owes suppliers, businesses, lenders and government agencies. Short term liabilities (payable in one year or less) can be items such as accounts payable, wages and sales taxes. Long term liabilities (payable longer than one year) are usually items such as bank loans or capital leases.
Equity is the last part of the equation. It includes the initial amount invested into the company by the owners and the retained earnings of the company. Retained earnings are the cumulative profits that have been earned less amounts paid out to shareholders in the form of dividends since the inception of the corporation.
The Balance Sheet is a barometer of the health of your business and it is one measure of the net worth of the corporation. If you compare the Balance Sheet from year to year you can see if your equity in the corporation is increasing, decreasing, or staying the same. Lenders constantly review the Balance Sheet and specific ratios of items on the Balance Sheet to determine the current and future financial stability of your corporation.
Recommendation:
If you have questions about the Balance Sheet and what is says about the health of your corporation, please contact Gilmour Knotts Chartered Accountants.
