Balance Sheets basically mirror the financial health of an organization specifically at the end of the scheduled financial period. Balance sheets answer all questions regarding the financial condition and are extensively referred and analyzed by equity shareholders, banks, investors and vendors.
Balance Sheet analysis also provides management with insights into income trends, debt standing and long-term financial consistency, all of which are crucial towards planning and execution of vital business policies. Balance sheet also functions as an indicator to the amount of debt that can be lent to the organization.
Lets look at some of the elements that make up the balance sheet.
In the balance sheet assets are categorized into Fixed and Liquid Assets. Real Estate, vehicles, machinery and everything that cannot be converted into immediate cash are categorized as Fixed Assets. Any assets that guarantee immediate conversion to cash are categorized as Liquid Assets.
Liabilities is the debt owned by the organization to its creditors, be it banks, vendors and even the salary it owes to the employees. Total liabilities gives a clear indication of the total money that an organization is obliged to pay in the short term and long term period.
Money readily available in the form of cash reserves at the end of accounting period are depicted as cash in the balance sheet.
Raw materials or any material that can be invested into making of the finished product and currently stored by the organization is entered into the balance sheet as Stock.
At any given point of time, the total liabilities must match up with the total assets of the organization in the balance sheet.