What is the balance sheet? Simple definition

The balance sheet is, first of all, a summary of the financial solvency of the organization. With it, you can understand the actual state of affairs in the company, how profitable or unprofitable it is. It is formed using grouping and generalized reflection of data about the company’s property and sources of its formation. Thus, a balance sheet definition is simple and easy to remember. 

This information will be useful to both the company’s management and potential creditors and investors. The balance sheet shows the status of assets, liabilities to third parties, and equity at a certain date. As a rule, the balance is formed on an accrual basis for one year, broken down into quarters. The balance is also subject to submission to the tax inspectorate and statistical agencies. Now, you know what to say when asked, “What is a balance sheet?”. 

What is the balance sheet? Simple definition

What’s On the Balance Sheet?

There are two main types of balance:

  • Static. It reflects the indicators on the date of formation. They are classified according to the following characteristics: current, introductory, dividing, final, liquidation, turnover balance, separate, consolidated, inventory;
  • Dynamic. It shows financial data for the company by turnover for a given period. This can be a chess balance and a turnover sheet.

All balances differ from each other for their compilation. It is accepted to classify them according to the following features:

  • by a source of compilation;
  • by type of activity;
  • by the object of reflection;
  • the time of compilation;
  • by volume of information;
  • by ownership.

The balance sheet structure is simple and consists of two parts: Assets and Liabilities. The data in them must always be equal, hence the name of the report. Assets show the property that the organization owns. Liabilities reflect the sources of the formation of this property.

The Assets include two sections:

  1. Non-current assets. Property of the company, the period of use and operation of which is more than 12 months. These can be buildings or long-term investments.
  2. Current assets. All equipment and inventory that will be used in less than 12 months. This includes materials, accounts receivable, raw materials, and so on.

The Liabilities contain three sections:

  1. Reserves and capital consisting of the company’s owners’ funds.
  2. Long-term liabilities may include loans with a maturity of more than 12 months.
  3. Current liabilities. This includes payment debts to employees, payments to suppliers that have a maturity of fewer than 12 months.

There are two ways to make a balance sheet:

  • Vertically. In this case, all balance sheet items are placed vertically below each other. The equation looks like this: Asset-Liability = Equity;
  • Horizontally. A more familiar type of report for most companies. In it, the balance sheet items are located on opposite sides: on the right side are the Liabilities (liabilities, capital), on the left side are the assets. The equation, in this case, will look like this: Asset = Liabilities + Capital.

The organization determines how the balance sheet is formed independently and reflects this in its accounting policy.

The balance sheet has a special form and is an official document that must be submitted to the tax service. If the organization, for some reason, did not submit the report on time, the company’s activities may be suspended by the regulatory authorities.