In the global business world, financial statements are very important and of great significance to investors as well as customers, among other stakeholders. This makes it mandatory for businesses to prepare financial statements, which usually reflect their fiscal position. Moreover, businesses cannot gain access to bank loans or financial services without financial statements that have been audited. It is in this regard that a reflection of a business’s performance must be documented in financial statements. These statements include a balance sheet as well as profit and loss statements, among others. The former shows a reflection of all assets (whether fixed or current) and liabilities of a business at a specific period usually referred to as an accounting period. In addition, Balance sheets also reflect the financing of assets and liabilities named above. These may include elements such as profits that have been retained and share capital, among others. This paper will explore a balance sheet along with its application in a business field (Gibson, 2011, p. 12).
A balance sheet may be defined as a statement that shows all assets (both fixed and current assets) and liabilities of a given organization or entity, usually at the end of a particular trading period. It is also important to note that a balance sheet reflects methods of financing all its assets as well as liabilities. In addition, all companies, through the companies’ act must present a balance sheet in their financial reports that are usually published at the end of a particular trading period.
This, therefore, shows how important a balance sheet is to the business world. Moreover, this financial statement may not necessarily give the “value” of a company or organization. This is mainly because intangible assets such as brands, market leadership as well as quality management cannot be reflected in a balance sheet. In essence, it does not show historical costs (Gibson, 2011, p. 12).
This financial statement has been influential in predicting the financial positions of businesses. This forms one of the major reasons for its stipulation in companies’ act, as a requirement.
A balance sheet is very important in reflecting business performance. This is mainly because it shows all the assets owned by an organization as well as that organization’s liabilities. This is very significant to auditors, potential investors, and employees, among other stakeholders.
One of the questions that arise when one deals with a balance sheet is whether it reflects the financial position or worth of a company. Other questions that also arise include the fact that it does not entail any account of tangible assets, which are traditionally important to companies and organizations.
A balance sheet is very important in the business field, although this is usually negated when dealing with companies that enjoy a wide base of intangible assets. This makes it quite difficult to estimate the real value of such companies. Otherwise, it provides a first-hand view of a business’s financial position (Tutor2u, 2011, p. 1).
Balance sheets form the backbone of businesses’ financial positions. Without it, estimation of business equity becomes difficult. Furthermore, all companies, through the companies’ act must present a balance sheet in their financial accounts that are usually published at the end of a particular trading period. A balance sheet is a reflection of business worth or equity and this is significant in determining how healthy that business is.
In addition, it helps businesses to gain access to potential investors as well as loans, among other benefits. This financial statement is therefore very important to the business world (Daniels, 1980, p. 13-14).
Daniels, M. (1980). Corporation Financial Statements. New York: Arno Press. pp. 13–14.
Gibson, C. H. (2011). Financial reporting and analysis: Using financial accounting Information (12th ed.). Mason, OH: South-Western Cengage Learning. ISBN 13: 9781439080603.
Tutor2u. (2011). Study Notes: Business Finance & Accounting. Tutor2u.net. Web.