Why a Balance Sheet is Important- Part 2

In the last article, we discussed the general attributes of a Balance Sheet, its features & importance, and Current and Non-Current Assets. In this article, we shall talk about different liabilities, Shareholder's equity, and techniques of analyzing a Balance Sheet.



Liabilities cause a significant impact on the financial conditions and business performance of companies. On the left hand side of the balance sheet are assets, with liabilities on the other side. They are the financial obligations that the company owes to others. Just like Current and Non-current Assets, liabilities also are of the similar nature. There are Current Liabilities, and Long Term Liabilities that sum up the figures on the right hand side of the balance sheet. A strong balance sheet is one that lists liabilities under segregated heads. This helps the firm to deal with current liabilities first. Current Liabilities comprise of wages, taxes, accounts payables, unearned revenue when adjusting entries, long-term bonds that are to be paid this year, short-term obligations, etc. Long term liabilities include long-term bonds, long-term leases, pension obligations, etc.



Shareholder's Equity is the net worth of a company. This amount is the shareholder's right to business assets under certain circumstances, and that is why listed under the liabilities section. It is also known as Owner's or Stockholder's Equity. The stockholder can claim these business assets after all the debts have been paid. So Shareholder's Equity forms the company's total net worth.



After creating a Balance Sheet with proper formulation of Assets, Liabilities and Net Worth, there comes a need to analyze the balance sheet. The Balance Sheet, if looked from a larger perspective, is only the raw financial data. It is maintained in the first place, to gather the company's financial worth. Using few financial ratios, the value of a balance sheet is realized. This can give an overview of financial stability of a company, along with company's financial workings.



So a Balance Sheet is a blueprint of the company's financial activities at a given point of time, covering its assets, liabilities, and shareholder's equity. It is important that a company knows about what it owns and what it owes at periodic intervals. The balance sheet is not only a company's requirement at the end of the fiscal year. Monthly updates about finances are instrumental for the company's growth.

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