FINANCIAL LITERACY • 23 JULY 2021 • 1 MIN READ

What is a balance sheet?

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Why is a balance sheet important?

Who uses balance sheets?

The balance sheet is one of the statements every business prepares at the end of each financial year. It’s a snapshot of the business’s assets, liability, and equity on a specific date.

Why is a balance sheet important?

While a profit and loss account is considered the most important financial statement (because it shows the profit), the balance sheet can reveal other relevant information.

A business may seem to be profitable, but the balance sheet may indicate otherwise:

Cash balance – if a business is making a profit, where is the money going?
Accounts receivable – if these are high, is the business having problems with its customers paying?
Accounts payable – a high balance may mean the business is struggling to find cash to pay its suppliers and employees
Property, plant, and equipment – what assets does the company have, and how appropriate are they for the business operations?
Loans – are these being paid off, or increasing?
Equity – a negative result (liabilities exceed assets) can signal insolvency

Who uses balance sheets?

Anybody asking for a business’s profit and loss account will also want to see the balance sheet. They go hand-in-hand:

The balance sheet may have more assets than liabilities, but how profitable is the business?
The profit and loss account may show high profits, but why is there very little cash?

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