Welink Accountants Welink Accountants
What is a corporate balance sheet and why is it important?

What is a corporate balance sheet and why is it important?

Welink Accountants

Welink Accountants

The corporate balance sheet is a representative picture of a company's assets and liabilities at a given moment, often displayed at the end of a quarter or a fiscal year. It is a summary of the company's annual accounts and financial statements drawn up within a single document. This table is structured according to the general chart of accounts.

 

 

Summary:

 

1. Importance of the balance sheet

  • a. To offer a financial perspective of the company
  • b. Understand how the company is financed
  • c. Provide an overview of the company's financial condition in the event of a takeover

2. Presentation of the balance sheet

  • a. Asset and Liability Mix
  • b. The different balance sheet models

3. Balance sheet assets/liabilities: what's the difference?

  • a. What does the asset contain?
  • b. What does the liability contain?
  • c. The general chart of accounts

 

 

1. Importance of the balance sheet

 

The balance sheet is above all a mandatory document, at least once a year, the manager of a company must draw up a balance sheet as part of his financial management and send it to the tax office. But why should a company draw up a balance sheet?

 

 

To offer a financial perspective of the company

 

The balance sheet shows the financial interest brought to a company:

 

  • It gives precise information on the company's financial health, including what it owns (assets) and what it owes to third parties (liabilities);
  • it makes it possible to check if the financial balance is respected;
  • It helps to extract, through a quick reading, some essential information that can be used to establish new management and steering arrangements.

 

 

Understand how the company is financed

 

Knowing the company's health through the balance sheet is essential for financial organisations and investors. It allows them to make an in-depth analysis of the financial model and to plan future investments.

 

 

Provide an overview of the company's financial condition in the event of a takeover

 

The balance sheet also gives a potential investor a precise idea of the power that the business withholds, its reputation and its means of action. In other words, thanks to the company’s balance sheet, an investor can make his personal judgment on the company and forecast future results and expectations.

In concrete terms, the table gives an overview of the company's past activities with the financial situation that resulted. It should be noted that this accounting document is generally accompanied by two other tables:

  • the balance sheet income statement which lists the income and expenses of the company during a given period with determination of the difference (result);
  • the cash flow plan, which translates expenses and income into cash flows.

After studying the importance of the corporate balance sheet, we can approach the different structures that make it up.

 

 

2. Presentation of the balance sheet

 

The company's balance sheet is mainly made up of two distinct columns: assets and liabilities.

 

 

Asset and Liability Mix

 

The assets on the balance sheet is a list of the items that the company owns: assets and receivables. While the balance sheet liabilities or "resources" provide us with information on the creditors mobilised by the company to finance its activities. This includes, in particular, banks, partners and suppliers. Here is a table summarising the main components of a balance sheet.

 

FIXED ASSETS                                              SHAREHOLDERS' EQUITY

All durable goods                                      Total company capital and reserves

of the company or fixed assets:                     from long-term partners' debts

- physical ;

- intangible assets ;

- financial ;

CURRENT ASSETS                                              OTHER DEBTS

All properties                                                           Obligations to

intended to be used                                           third parties in the form of cash:

current assets: inventories and receivables     Short-term debts, tax, social security, 

                                                                                           bank debts, etc.

TOTAL ASSETS                                                    TOTAL LIABILITIES

 

 

The result of the balance sheet should be balanced: total assets must equal total liabilities. If this is not the case, it is recommended to set up an adjustment account so that the total always remains the same in both columns.

 

 

The different balance sheet models

 

There are different ways of structuring a company's balance sheet. This offers a more in-depth reading on each element that one wishes to analyse. From this table, one can draw:

 

  • The financial balance sheet

 

This balance sheet includes the same information, highlighting the liquidity of the assets (liquidity balance sheet) and the due date of the liabilities. This option makes it possible to better determine the company's ability to repay its debts using the assets. This document is often required for a bank loan.

 

 

 

The functional balance sheet uses the terms "uses" and "resources" instead of assets and liabilities. This table is used to assess the company's working capital and establish its financial requirements.

 

If working capital is positive, it means that the company has a self-financing capacity. Otherwise, borrowing is required to continue operations in accordance with the standards.

 

 

  • The forecast balance sheet

 

As its name suggests, the forecast balance sheet is a forward-looking table, generally drawn up at the time of the company's creation. It is drawn up to forecast the first 3 to 7 periods of the coming fiscal year.

 

 

3. Balance sheet assets/liabilities: what's the difference?

 

If accounting requires that the total of the two columns should always be equalised, it is important to clearly distinguish the "asset" part from the "liability" part of the balance sheet to better draw up a balance sheet that is faithful to the standards of the chart of accounts.

If the assets determine all the assets and rights that the company owns, the liabilities relate to its debts. A detailed analysis of these two columns provides a clear understanding of the balance sheet.

 

 

What does the asset contain?

 

As shown in the table above, the asset in the left column includes :

investments, including permanently and durably fixed assets (business goodwill, set-up costs, buildings, installations...) ;

inventories and work-in-progress (raw materials, work-in-progress, finished products, etc.);

trade receivables and cash, in particular advances, deposits and cash on hand.

 

 

What does the liability contain?

 

Liabilities are in another sense the debt the company holds to operate and make a profit. It includes :

equity capital, in this case, fixed debts (investments, reserves, etc.);

current debts (bonds, miscellaneous financial debts, etc.).

 

To draw up all the components of the asset/liability balance sheet, it is essential to refer to the general chart of accounts. The latter contains details of the various categories in which the components of the table should be found. A figure at the beginning of each component allows you to quickly find your way around.

 

 

The general chart of accounts

 

The general chart of accounts, an indispensable document in accounting, is used in all accounting entries, for instance in the company's balance sheet, income statement, trade balance and many others. Available to download for free, it is defined as follows, according to the 2005 General Chart of Accounts:

 

  • class 1: capital ;
  • class 2: fixed assets ;
  • class 3: inventories and work-in-progress ;
  • class 4: third party accounts ;
  • class 5: financial accounts ;
  • class 6: expenses ;
  • class 7: products ;
  • class 8: special accounts.

 

The accountant must draw it up in compliance with all the rules. The regularity of this balance sheet is compulsory when the declaration is made at the end of the financial year.

Are you an accountant?

List your firm on the leading platform for accountants and auditors