One of the most important parts of financial statements is the balance sheet report. So what is a balance sheet?
Basically, the balance sheet is the part of the financial statements that records information related to assets, payment obligations to related parties in the company’s operations, and capital at a certain time.
Read more on the explanation of the form of the balance sheet below.
What is the definition of a balance sheet?
To answer the question what is the definition of a balance sheet, continue reading this article.
What is a Financial Balance?
Accounting is one of the most important things to master in running a business.
By understanding accounting, you can prepare accurate financial reports, so you can know the current state of your business.
What is a balance sheet? Basically, the balance sheet is the part of the financial statements that records information related to assets, payment obligations to related parties in the company’s operations, and capital at a certain time.
The company’s financial statements that present the accounts of assets, capital and liabilities in a certain period are called the balance sheet financial statements.
The form of the balance is divided into two, namely horizontal and vertical (staff).
The value of capital on the balance sheet is the value recorded in the statement of changes in capital.
The balance obtained on the balance sheet because the report consists of revenues and expenses recorded in the income statement.
The Structure of the Financial Balance Report is as follows
Assets = Liabilities + Capital
For example, a user of accounting software has finished filling in the opening balance of the account.
After paying attention to the formula above, you will determine the balance on the balance sheet, especially if you are going to fill in the opening balance of the account.
Therefore, the list of beginning account balances appears negative in historical balancing .
This indicates an imbalance.
Negative values will make it easier for users to find out which posts actually have excess values.
You can find out for yourself which post the value should be subtracted from and to which post the taken value should be added.
In addition, from the above formula, you will know the normal position of a balance sheet account when used in the journal.
From there, you can find out the normal position of the account in question.
An example of a balance sheet is as shown in the table below:
|Account name||Normal Position|
The above means that:
- If there is a capital deposit to the company, the cash position is debited and the capital is credited
- If the company pays debt from cash, then the debt position is in debit and cash is in credit.
The balance formula is the main thing in every preparation of the balance sheet statement.
You must ensure that there is a reciprocal relationship that shows a balance between assets with liabilities and capital.
The amount of liabilities and capital provides an idea of how we manage assets. Here’s the explanation.
Assets refer to the entirety of the resources you own.
This includes cash, accounts receivable, inventory, land/land, buildings, vehicles, machinery, equipment, and so on.
Based on the period of use, assets are divided into two types, namely current assets and fixed assets. These assets are also included in the balance sheet.
Current assets are assets that have a short-term useful life, can be converted into cash within a maximum period of one year.
Meanwhile, fixed assets are assets that are used for a longer period of time (more than one year).
Based on the form of assets, assets are divided into two types, namely tangible and intangible assets.
Over time, the value of the fixed assets that you own may depreciate due to the decreasing life of these assets.
Liabilities are debts to other parties that must be paid, both in the short and long term. You will find liabilities on the balance sheet.
Liability accounts usually include debt, unearned income, and accruals (expenses that are due at a later date).
Liabilities are divided into two types, namely current debt and long-term debt.
Current debt is debt that must be repaid within one year or less than one year.
Meanwhile, long-term debt is debt that must be repaid within a period of more than one year.
Based on the reciprocal relationship, equity can be defined as the difference between the components of assets and debt.
Asset – Liability = Equity
The component of equity in a balance sheet is the balance of the ending capital of the business.
The Form of the Financial Balance Report is as follows
The financial balance has two forms, namely horizontal and vertical. Both are used according to the needs of the company.
Balance Sheet Report in Horizontal Form ( Account Form )
The scoring balance is also known as a T-shape balance.
This report presents accounts in two sides, namely assets on the left and debts and capital (liabilities) on the right.
An example of the form of a financial balance report is as follows.
Per 31 Desember 2015
|Current asset||Current Debt|
|What||3.000||– Notes payable||500|
|– Bank||2.500||– Accounts payable||2.500|
|– Securities||1.000||– 1 year bank loan||2.750|
|– Accounts Receivable||3.500||– Tax debt||250|
|– Stock||2.000||– And others|
|Total current assets||12.000||Total current debt||6.000|
|Fixed assets||Long-term debt|
|– Land||1.000||– Bonds||2.000|
|– Building||2.500||– Mortgage||1.500|
|– Machines||2.000||– 3 years bank loan||3.000|
|– Equipment||1.500||Total long-term debt||6.500|
|Total fixed assets||7.000||Equity|
|Other Assets||– Modal sector||6.500|
|Building in progress||1.000||– Retained earning||1.000|
|Total other assets||1.000||Total equity||7.500|
|Total Active||20.000||Total Passive||20.000|
Vertical Balance Sheet Report ( Report Form )
What is a vertical form balance sheet? Commonly referred to as a balance sheet in the form of a report, because of the sequential arrangement from top to bottom in order.
The vertical balance sheet in the form of a report is arranged in order from the top asset group to the bottom debt and capital group.
An example of a vertical balance sheet is as follows.
Per 31 January 20212
|NO ACCOUNT||ESTIMATE/ ACCOUNT||DEBIT||CREDIT|
|TENT RENT RECEIVABLE||10,000,000|
|ACCUMULATED OFFICE INVENTORY DESCRIPTION||(250,000)|
|SALON EQUIPMENT ACCUMULATIONS||(600,000)|
|ACCUMULATION OF TENT EQUIPMENT DEPRECIATION||(750,000)|
|BUILDING RENT PAID IN ADVANCE||24,583,333|
|CURRENT MONTH PROFIT||81,713,333|
Some companies more often use a form of balance sheet that extends downwards.
However, use in the form of the side is also still legal.
The use of different forms of balance sheets is adjusted to the number of accounts used.
The more accounts there are, the more effective the vertical is.
Usually, the form of vertical is more often used by large companies, because these companies have very many accounts and large values.
Meanwhile, the form of control is usually easier to see, because the assets and liabilities are directly visible on the right and left sides.
The scoring form is used when there are a small number of accounts and values.
You can also create balance sheet reports easily by using online accounting software.
In addition, the accounting software also helps your business in making financial reports without having to write repeatedly.
An example of the form of a financial balance in the Journal Accounting application is as follows.
Of course you can try it yourself for free, or ask our sales directly to schedule a live demo.
Tips for Reading a Financial Balance Report
An easy way to read and compile a balance sheet report is as follows:
Make sure the final balance is balanced
Before you read the balance sheet, make sure it’s accurate first.
That a balance sheet has a left side for presenting asset data, and a right side for liabilities and models.
On the left side (assets), all accounts related to assets, both current assets and fixed assets are separated to find out the amount of each noun.
Meanwhile, on the right side all accounts related to liabilities and capital can be seen according to the work sheet that has been made previously.
Thus, the final balance of the balance sheet should be balanced.
So, always make sure the amount from the left and right side of the balance sheet is balanced.
If there is a difference between the two, you need to double check. Because, the possibility of an error when recording.
Compare between accounts receivable and accounts payable
You need to pay attention to the balance of receivables and debts when reading the balance sheet.
Because, this will affect the short-term cash flow of your business.
If you have a number of receivables that are greater than debt, then you have to pay more than getting money from credit sales.
In addition, you need to pay attention to both accounts, because billing customers requires effective cooperation between sales and accounting.
This is to ensure that each repayment due date is carried out in accordance with the terms of credit sales.
Pay attention to cash balance
Cash is called the most liquid asset, meaning you can use it directly to buy anything.
When starting a business, the main thing to do is finance the business and control the inflow or outflow of cash.
Therefore, you need to monitor changes in cash in the asset component of the balance sheet statement.
Pay attention to inventory balance
You need to pay attention to inventory, which is also an important asset in business operations, either manually or with the help of a stock application.
To increase inventory turnover in a business, is a challenge for businesses.
You can calculate the inventory turnover ratio effectively by calculating the ratio between sales and inventory. To make it easy we recommend using an inventory application for optimal results.
If, the business inventory turnover ratio decreases, then you need to reduce inventory.
Pay attention to the loan balance in the liability account
Performing an analysis of short-term and long-term debt is an important thing that you must do.
The balance of long-term debt is usually in the form of bank loans, and short-term debt is interest debt that must be borne.
In addition, you need to pay attention to the amount of the ending balance of each account.
If the loan balance is greater than the cash balance, your business may be in a difficult situation.
This is one way to check the amount of money you borrow from the bank.
Those are the things about the balance sheet.
Once you understand what a balance sheet is, how to make a balance sheet and read it properly, it will help you in making business decisions.
To make a balance sheet, you can use the Journal accounting software, just search on the net.
Hopefully this information can be useful for those of you who need it, and don’t forget to share it on social media.