Balance sheet - What is it and how to do it?

A company's Balance Sheet represents the finished product of the accounting process for a period of time. It may have different names, depending on the country where the company operates, for example: Balance Sheet , Statement of Financial Position, or simply Balance Sheet.

Drawing up a Balance Sheet of Accounts is not an easy task, even for experts on the subject, but what is fundamental is the organization of the documentation and information, and the timely recording in time, which is faithful to the economic and legal reality of the company.

What is the Balance Sheet of a Company?

Based on the general outline of a company's balance sheet, there are two traditional definitions that describe the operation in detail.

Legal Definition of Balance Sheet of a Company

The Balance Sheet represents, on the one hand, the goods and rights in favor of the company at a given moment in time(assets), on the other hand, the obligations contracted at the same date(liabilities); and as a difference, the equity belonging to the owners(net equity).

Legal formula: 

Assets - Liabilities = Equity

Economic Definition of Balance Sheet of a Company

The Balance Sheet shows the sources of financing existing at a given time, both from third parties outside the company and from the owners of the company(liabilities and equity) and the investment or application that has been made of this financing(assets).

All investments are summarized and materialized in assets. investments made. The liabilities and equity summarize the resources available to a given company. resources of which a given company has at its disposal. In short, the liabilities and shareholders ' equity contain the sources of resources and on the assets side its applications.

Economic formula or from the point of view of resources: 

Assets (applications) = Liabilities + Equity (origins)

When to perform a Balance Sheet?

A company's Balance Sheet provides information on the situation of sources and applications of resources at a given cut-off date. 

Users of accounting information need to know the Company's Balance Sheet at a given date in order to make decisions based on economic reality in an efficient and timely manner.

Beginning Balance

It is the Balance Sheet of a company at the date of its incorporation. It is usually composed of assets owned by its owners. 

A simple example would be the following:

In this assumption, the net worth is composed of 100,000 monetary units representing the initial capital stock contributed by the partners of the company. Assets, for example, may be composed of real estate, money in bank accounts, and cash or cash on hand.

Final Balance

It is the Balance Sheet of a company at the closing date of the financial year or balance sheet date. At the time of incorporation, the partners set a closing date for the fiscal year. In some countries, the closing date is mandatory on December 31 of each year, but in other countries, the partners are allowed to set the closing date at the end of the month of their choice.

A simple example would be the following:

In this assumption, equity is composed of 100,000 monetary units representing the initial capital stock and 100,000 monetary units representing the profit for the fiscal year. 

Liabilities consist of 80,000 monetary units representing the short and long-term obligations or debts incurred by the company to finance the investment in assets. 

Assets consist of 280,000 monetary units, which include: real estate, plant, machinery, computer equipment, merchandise, investments in foreign currency, money in bank accounts, cash or cash on hand.

Cutting Balance

It is the balance sheet of a company as of a date necessary to make efficient and timely decisions by users of economic-financial information. Examples of balance sheets as of the cut-off date are the following:

• Cut-off balance for follow-up: monthly, quarterly, half-yearly balance.
• Cut-off balance for special transactions: special balance as of a certain date, necessary to bid in a bidding process with the Government or with large private companies.
• Cut-off balance sheet for Due DiligenceCut-Off Balance Sheet: special balance sheet at a specific date, necessary to value and analyze the company's composition, for the purpose of M&A transactions, i.e. sales of goodwill, acquisitions, mergers, spin-offs, corporate transformations, joint ventures, acquisition of special loans, etc.

How to make a Balance Sheet?

A Balance Sheet of a Company requires the following tasks to be performed:

1. Documentation of each of the company's economic-financial operations.
2. Classification and accounting recording of documentation.
3. A summary of the accounting entries in a trial balance as of a given date.
4. Preparation of the Company's Balance Sheet as of a determined date.
5. Arithmetic control: total Assets must be equal to the sum of Liabilities and Net Equity.

Structure of the Balance Sheet of Accounts

The Balance Sheet is usually organized as follows:

• Assets: by degree of liquidity, i.e., at the top are those assets with the greatest possibility of being converted into cash or cash equivalents. They are classified into Current Assets and Non-Current Assets.
• Liabilities: by the date of cancellation of the obligations contracted by the company. In the upper part are the obligations to be cancelled in the short term and in the lower part the obligations to be cancelled in the long term. They are classified as Current Liabilities and Non-Current Liabilities.
• Equity: recorded as a very long-term liability, i.e., it is the company's liability in relation to its owners. 

How to calculate the Balance Sheet?

The company's Balance Sheet is structured into assets, liabilities and equity. At the same time, assets are classified as current and non-current, as are liabilities. 

Shareholders' equity contains shareholders' contributions, voluntary contributions from third parties and the profits or losses generated by the company during its operations.

General calculation formula:

Assets = Liabilities + Equity

And the disaggregated formula...

Current Assets + Non-Current Assets = Current Liabilities + Non-Current Liabilities + Capital + Profit or Loss

Sample Balance Sheet of Accounts

Why is it important to make a Balance Sheet in the Company?

The company's economic-financial information is essential for efficient and timely decision making by users, for example: partners, investors, suppliers, customers, banks, governments, etc.

The valuation and disclosure of economic-financial information makes it possible to determine the value and composition of the company at a given date, and this will allow, for example, to adequately determine the value of the company's shares at a given time, the possibility of receiving loans from banks and the government, the probability of winning a bidding process, among others.

The economic-financial information must comply with certain assertions that guarantee the reasonable assurance of the information reflected in the Company's Balance Sheet, and which are supported by the accounting documentation and records, as follows:

- Existence: assets and rights belong to the company, debts or obligations have been incurred by the company, the capital stock has been constituted by the partners, the results obtained are genuine. The supporting documentation of the operations exists.

- Completeness: all transactions involving the company's assets, liabilities and shareholders' equity have been recorded. The supporting documentation is complete.

- Truthfulness: operations involving goods, rights, obligations, debts, capital and results are true. Commercial documents are true and pertain to the company's operations.

- Valuation: assets, rights, obligations, debts, equity and results have been measured in accordance with current international and local accounting standards.

- Exposure: assets, liabilities and shareholders' equity have been fully disclosed in accordance with current international and local accounting standards.

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