Accounting Balance sheet:how to use it and practical tips

You must have heard the expression “closed for balance”, usually indicating that something or someone is in a moment of analysis about something, isn’t it true? In the business world, the balance sheet is really very important when it comes to analyzing the panorama of an enterprise : with this instrument, the company can check quantitatively and qualitatively what is its financial situation during a certain period and, thus, make important and safe decisions for your future.

Accounting Balance sheet structure

Maybe you’re wondering how to set up a balance sheet , don’t you? Well, the structure of the balance sheet is divided into three broad categories:

Assets:  this part of the balance sheet records everything the company has in some way, that is, its assets and rights. The assets are formed by everything the company has in its possession at the moment, such as machinery and equipment, while the rights are what the company owns, but which is not in its power, as resources deposited in the bank. In short, assets are everything that can generate economic benefits in the future, such as goods, products in stock , invested resources, financial investments , among others.

Liabilities:  this part of the balance sheet includes everything that the company “owes” to third parties, that is, its debts and financial obligations. Debts are accounts payable to suppliers, for example. Obligations refer to assets that are not owned by the company, but which are under its power, such as the payment of employees.

Equity:  is the difference between assets and liabilities, that is, the capital that the company has in cash. The ideal is that the company has assets always greater than the liabilities. It is also important that this amount grows positively each month, accumulating and increasing the organization’s assets.

Balance sheet subdivisions

In addition to the above division, we can subdivide assets and liabilities into categories to facilitate calculations and statements . For assets we have:

Current assets : are the assets and resources invested that can be converted into cash in a short period of time (less than one year), such as accounts receivable and inventories.

Non-current assets: these  are long-term assets, with realization over one year, such as, for example, corporate quotas.

Liabilities can be divided into:

Current liabilities: these  are the obligations that the company has to pay during the accounting year, such as employee salaries, suppliers and taxes.

Non-current liabilities: they  are similar to current liabilities, but these are obligations to be paid over a period greater than one year, such as financial loans.

Balance sheet model

We have seen so far that there is a lot of information available on a balance sheet and you should imagine that it does not appear as magic on the balance sheet. And, of course, it’s absolutely right! However, before detailing an example of a balance sheet, it is important to note that the company must have recorded all its accounting facts, that is, all the balance sheet accounts, composed of the movements of its assets and liabilities. This information needs to be included in any balance sheet model.

These movements that we have just mentioned, in turn, must be recorded in the daily book and documented in order to prove these accounting facts. Only in this way is it possible to prepare a balance sheet that is trustworthy to the company’s situation and that makes it possible to analyze its real financial situation .

After ensuring that all information is available to prepare the balance sheet, it is time to put everything on paper. The first thing to be informed is the name of the company and the period in which the survey was made. The information on the balance sheet accounts follows, which should be arranged as follows: assets on the left and liabilities on the right.

To facilitate the analysis, the accounts must be arranged by their liquidity situation, that is, in relation to the period in which they must be transformed into cash for the company. Accounts that are more liquid and thus will turn into cash more quickly come first on the balance sheet, followed by those that are less liquid.

An important tip to understand if your balance sheet is correct is to start by checking the totals. The total assets in a company must always be equal to the total liabilities. This is due to the so-called Double Match Method , in which each financial transaction is recorded as entries in at least two accounts, in which the total debits must equal the total credits. This method was registered by Luca Pacioli in 1494, but to this day it remains the standard system used worldwide by companies and other organizations to record financial transactions.

Leave a Comment