Learn all about what a company's balance sheet is and what its characteristics are in this post ! Detailed explanation!
Balance sheet of a company
A company's balance sheet , or statement of financial position, is a report that reflects the company's true financial situation. In many cases, it can be considered a snapshot of the organization's financial health.
The balance sheet of a company is made up of a set of accounts that are classified as assets, liabilities and equity. This financial report allows shareholders or future investors to see the behavior of the real accounts of the company.
In general, this report is shown in an annual period where the reality of the organization is shown in the assembly meetings. In the same way, it can be requested for complete evaluations on a monthly, bi-monthly or quarterly basis, the important thing is to execute it to know the benefits and the actions that we must take at certain times.
It's important to understand that a company's balance sheet and other financial statements are fundamental and necessary to understand which strategies, prices, or investments we need to consider to achieve the expected return. On the other hand, financial statements will vary depending on the activity or sector in which we work. If it's a company focused on buying and selling or providing services, this article will guide you in detail. However, if your organization is more structured and dedicated to the creation or manufacturing of a product, we invite you to visit the following link: Importance of Cost Accounting
It is important to note that the balance sheet of a company is fed from the statement of financial position or profit and loss statement where the profits or losses that were generated within the company in an established period of time are shown, specifically in the equity of the company. company.
It should be noted that for accounting purposes the International Accounting Standards were accepted as a way of presenting the financial statements. However, since the entry into force of the International Financial Reporting Standards, these reports have had variations at the time of presenting these statements.
To understand a little more the difference between IFRS and NICs we leave you the following video
In summary, the general balance of a company allows us as shareholders, owners or investors, to know in a complete and global way the financial and patrimonial state of the company. So it can show us if the organization is getting the performance that is expected or planned.
Structure of the Balance Sheet of a company
As we have already highlighted on different occasions, the balance sheet of a company is made up of real accounts that are divided into assets, liabilities and equity. Below we will explain each of these parts:
Assets of the Balance Sheet of a company
Assets on a balance sheet in a company are defined as the resources, securities that a company owns. These assets can be personal property, infrastructure, vehicles, land, equipment, computer systems. But the assets also include those invoices for which we have the right to collect the different invoices or promissory notes delivered to our clients.
Among the assets we can also mention we can mention and include the different titles, bonds or investments that we have in the name of the legal entity, that is, the companies, companies, corporations.
In the asset that is shown in the balance sheet of a company we will find the resources that allow us to have liquidity not in the short term but in a certain time that allows us to establish a profitability. In this article we are going to present both the presentation of the IFRS and the NICs so that we have a much more general knowledge.
Asset under IFRS
The assets within a balance sheet of a company, presented under IFRS are divided into current and non-current assets.
Current assets
Current assets within a balance sheet in a company are defined as all those goods and different rights that we have as a commercial organization. These assets and rights have the ability to be valued at a monetary level, patent accounts receivable, among others.
It should be noted that this group of accounts was previously known under International Accounting Standards as current assets. These accounts were modified under the International Financial Reporting Standards (IFRS) and are called current assets.
It is important to understand that for an account to be classified as a current asset it must meet the following characteristics:
- Assets must be able to be sold or consumed through the normal cycle of operation.
- The current assets within the balance sheet of a company should allow us to maintain the asset in order to be able to establish different types of negotiation.
- Current assets must be characterized by the ability to become cash or by the non-use of restrictions for exchanges for liability accounts.
When we look at an example of a company's balance sheet, we realize that the best example to classify and understand these accounts is the money we have in cash or in bank accounts.
non-current assets
On the other hand, non-current assets are defined as the goods that we have with the purpose of lasting within the organization and that we can have liquidity at the time of purchase.
Among the most important characteristics we can denote that non-current assets are a fundamental piece in the long term, with the ability to achieve liquidity at a given time. We must remember that these assets are focused on the operation of the organization and that at the time of their acquisition they were not intended to be used for sale.
When acquiring these assets for our organizations, companies or businesses, the main idea is to keep them within our operating systems for a long time. It should be noted that the value of these assets within a company's balance sheet is going to be recorded under the nominal value, this means that the acquisition value will be taken into consideration.
In order for the assets to be classified as non-current assets, we must take into consideration some of the characteristics that we will mention below:
- The investments we make must be considered in the long term as shares and different capital contributions.
- These assets are considered as fixed elements within organizations, in this category office or work equipment, land, among others.
- Finally, these non-current assets can be characterized as completely intangible assets that are usually identified as property rights, patents or intellectual rights.
Active under IAS
The assets that are managed under the International Accounting Standards are the same as in the IFRS, only the way they are presented changes. Since they are ordered or classified depending on their ability to convert into liquidity.
Working capital
They are the assets, rights or goods that we can quickly convert into cash within an extremely short period of time, usually less than a year or before the end of the fiscal year.
Within the classification of current assets of a balance sheet of a company presented under International Accounting Standards we have Cash, Accounts Receivable, Banks, Inventories, among others.
Fixed
A fixed asset within the balance of a company is defined as the good that the company has, whether intangible or intangible. They are those assets that we need for the operation of the company and that we have not destined for sale, within this category we find technological equipment, machines, vehicles, land, buildings, among others
deferred
This item is very characteristic since they are not assets or goods that belong to us but rather sections that are created by the company's operations. They are those expenses or costs that we have established or that we have paid in advance, such as insurance paid in advance, leases, rental deposits, among others.
Criteria for establishing the value of assets
As we have already established, the assets represent benefits for the company, which can materialize in different periods of time. The important thing is that we manage to establish the proper functioning and performance, liquidity and viability that can benefit our organization.
That is why assets can be classified according to different criteria, which are:
- Historical cost: It is the value that is assigned to the different goods in order to have a certain rooting within the organization. It is important to understand that although the real cost is not equal to the historical cost, the latter should be assigned for traditional reasons.
- Selling costs: refers to the value we will assign to a company's balance sheet asset if we need to sell it. In this value we must take into consideration factors such as years of use, market value and the profit we want to obtain.
- Amortization cost: It refers to the value that the good has been wearing away. Generally, to calculate this value, the historical value is simply divided by the amount of time in which the asset is considered to be an asset of the organization.
- Net worth: At this point we refer to the cost of the asset after having paid taxes, amortization, suppliers, expenses, among others.
Liabilities of the Balance Sheet of a company
Liabilities are the opposite of the definition of a company's assets. They are the obligations or debts that organizations acquire for the normal activity they have. A more technical definition would be that the liability found within the balance sheet of a company is the financial capital where the external financial source originates.
In this classification of the balance sheet of a company we will find medium, short and long-term debts. Which, like the asset, are classified depending on the payment time we have with them.
It is important to note that when a liability increases the balance sheet of a company, it must recognize the increase in assets, this is evidenced in the same way if the liability decreases since it is translated as a financial expense.
It is important to understand that short-term liabilities determine the viability of the business, since if we have extremely high liabilities and a short cash flow, we will find ourselves needing to finance ourselves, which means that operationally we are not generating what enough to cover our obligations.
Liability under IFRS
Like the assets, the liabilities of the balance sheet of a company presented under the International Financial Reporting Standards (IFRS) are classified as current and non-current:
Current Liabilities
The current liabilities within the balance of a company is the one that includes the debts that we may have in the short term or the obligations that we have in a period of less than one year.
Current liabilities are defined as the source of financing that the company has since it can through loans that we have requested as an organization from different financial entities.
According to the general accounting plan or the chart of accounts managed by the organization, the current liabilities within the balance sheet of a company will be comprised of liabilities that are linked to non-current assets that are destined for sales, accounts payable both services such as suppliers, commercial creditors, among others.
As we have highlighted, these obligations must be abandoned or canceled within a period of less than one year through the resources that we have in the current assets of the balance sheet of a company.
These obligations must be canceled regardless of their origin or how each of these obligations has been contracted in order to cancel each one of them.
non-current liabilities
The non-current liabilities within the balance sheet of a company are defined as the debts that we have to cancel in a period greater than one year, which means that although we must not cancel the original debt within this year, in general, if we must cancel the interests that are married to it.
One of the most important differences that we find between the current and non-current liabilities of an organization is that the second can be used as a negotiation with the shareholders to achieve an advantageous capital or financing force in case they were to use it or request the different banking entities.
Among the elements that can be established or that constitute non-current liabilities, we find long-term provisions, long-term debts or debts with different business organizations, liabilities that are created by taxes paid in advance, among others.
Among the benefits that we can find within the non-current liabilities of the balance sheet of a company, we can name that this liability provides liquidity to the company that allows us to generate new investments to accelerate organizational growth plans for our company.
Liabilities under IAS
As we have already defined, liabilities are the obligations or debts that any company has. Within the International Accounting Standards (IAS) they are classified by means of enforceability in which the debts must be settled.
Working capital
These are the debts that the company contracts that are less than one year, the obligations that cover these characteristics are those that are considered short-term. Another characteristic that covers short-term obligations is shown as the intention that exists to maintain a constant turnover.
Within the current liabilities within the balance sheet of a company we can find accounts classified as bank obligations, accounts payable to suppliers, accounts payable to services, advances established by customers, among others.
Long term
Among the classification established for long-term liabilities within the balance sheet of a company, it is the one that is defined as those debts or obligations that were contracted by the company and that have a payment duration of more than one year.
Among the accounts that fall under this heading when presenting a balance sheet of a company are bank promissory notes, mortgage loans, among others.
Deferred
Finally, within the classification of deferred liabilities presented within the balance sheet of a company for which the application within the results of an accounting year. Among the accounts that we can name are income received, reimbursements, both received in advance.
Patrimony or Capital
This is the last resource that we find within the structure of the balance sheet of a company and is defined as the place where the resources of the partners or owners of the companies.
Accounting capital is the difference between assets and liabilities. Due to the accounting nature, the equity or social capital that is presented within the balance sheet of a company is broken down as the contributions made by the partners within the company and the other point is each of the reserves or the benefits generated and not worked by the company.
On the other hand, we enter equity or stockholders' equity that has these accounting characteristics such as that which should not be required, this means that none of the company's partners can request a return of the investment.
Another of the characteristics of these accounts is that they do not have any type of financial cost, although it is considered a debt that the organization has with each of the shareholders.
Balance Sheet Objectives
Among the objectives that it seeks to show the statement of financial position or the balance sheet of a company is to understand what the nature and value of the assets are. On the other hand, understand the scope and where the obligations of the company arose.
In the same way, through the balance sheet of a company, we can understand if the liquidity that we present is insufficient or we have a surplus that we are wasting.
On the other hand, it helps us to study in a complete and detailed way the rotation of our inventories, which will show us the surplus or the lack that we have to execute the organization's sales action plan.