Why Your Accountant Uses a Balance Sheet

Balance Sheet Liability Asset Finance Company Business

Balance Sheets

Once of the most important tools you will ever see your accountant use is a balance sheet. A balance sheet is a financial statement which gives an accountant insight at any given time as to what exactly your business is worth. The overall purpose of the balance sheet is to help the company determine where they stand financially for both tax purposes and also for business purposes.

In a well-conceived balance sheet, you will be able to identify the total number of assets a company has as well as the amount of equity. Unfortunately, balance sheets cannot show everything; however, they do a great job at showing increases and decreases in revenue.

What Does a Balance Sheet Look Like?

A traditional balance sheet generally has two sides which are required to balance each other out. For example, if you have a company and you decide to withdraw a $1 million loan from the bank, your assets would increase to $1 million but your liabilities will also increase because they have to balance each other.

Simple Equation

The formula of the balance sheet is quite simple: assets = liabilities + owner’s equity. The balance sheet literally has the power to provide a snapshot of your company’s accounts at any given time. This sheet, combined with your income and cash flow statements, can be a critical piece of documentation, especially for investors.

Defining Terms

So what exactly are liabilities and assets? Well, it’s quite simple. An asset is property owned by a person or company, regarded as having value and available to satisfy debts, commitments, or legacies. A liability is defined as a company’s financial debt or obligations which arise during the course of its business operations.

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