Role of Balance Sheet in Analyzing Financial Statements

A balance sheet is one of the three important statements that form the basics of financial management. Along with the income statement and cash flow statement, the balance sheet is regarded as a key aspect to determine the financial health of any organization. The balance sheet provides a complete picture of the transactions. It clearly states the financial position of any company. Breaking it down, a balance sheet consists of three basics parts. The left side is consisting of assets, everything the company owns. The right side shows liabilities and owners’ equities. The right side shows the claims of investors and creditors of the company, and to what extent. A balance sheet is an important tool used by businesses. For further knowledge of the term, keep reading this article. 

Importance of Balance Sheet:

A balance sheet has got many benefits and roles to play. It plays a dual role; both inside of a company and from outside. Shedding further light on this; the balance sheet assists internal management in making informed financial decisions. It also portrays an image of the internal financial health to outside stakeholders like investors and creditors of the respective company. Also known as the statement of monetary position, a balance sheet reveals what you own (your assets). They additionally show what you owe (your liabilities) at a particular point as expected. The remaining — investors’ value — is your organization’s total assets.

Crucial Information source: 

Additionally, a balance sheet gives the data you need to continue and develop your business over the long run. Since they are very attention-seeking reports, they must be prepared involving the expertise of the best accounting firms in Dubai. A balance sheet briefly records your assets and liabilities in a single statement. Current assets and long-term assets mirror your capacity to create money and continue the business. In correlation, short –term and long-term liabilities organize your business’ financial commitments. In a perfect situation, if the value of assets exceeds that of liabilities, the business is said to be in a good financial position. All this necessary information is provided by the balance sheet. It helps the management make informed decisions about crucial financial aspects. 

How does balance sheet affect financial health?

A balance sheet is regarded as the indicator of financial health for a company. It pictures the entire position of a company on a single page. Mentioning the balance sheet equation – Assets = Liabilities + owners’ equity – it shows everything a business owns and owes. How much the business owns and how much the business has to pay? The answers to these questions lie in a balance sheet. The reason the balance sheet is regarded as the indicator of financial health is quite obvious. It assists internal management to take steps regarding the capital structure of the company. Referring to the capital mix, it is an important aspect of financial health and position.

Determining the “Risk and Return” aspect:

A balance actually compares the total assets against the total liabilities of a business. By doing so, the management can clearly get a vivid picture of the financial position. It also put the company in a position to decide whether it can cover its short-term liabilities or not. If the amount of short-term debts is exceeding the short-term assets, the business is certainly in need of cash from an outside source. The outside sources could be investors and creditors like Banks. It informs the management of prospective risks and returns aspects. As mentioned earlier, the capital mix is a crucial financial aspect and the balance sheet tends to balance that mix. An optimum level of the capital mix can set an organization on a profitable track. However, if there is too much debt on a company’s balance sheet, the company is at risk of loss or even bankruptcy. 

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To whom does it belong?

As said earlier, the balance sheet plays a dual role. It assists the financial managers to make informed decisions as well as the investors and debtors to claim their part. Talking about the outsider investors and debtors, they either want dividends or interest. In the case of shareholders, they will demand dividends if the balance sheet shows a profit. In the case of creditors like banks, they will ask for the interest payment in case of a positive number on a balance sheet. It is the decision of the top management either to disclose this information to the outsiders or not. But the role of the balance sheet is quite obvious and it belongs to both parties. For paytm kyc visit paytm kyc online verification at home.

Conclusive Note:

Summing up the points, it is imperative to pay a fair bit of attention to the balance sheet. While reporting, all the financial statements matter but the balance sheet matters the most. Large companies need to prepare balance sheets by hiring the best VAT consultancy in Dubai since they offer high-quality services. The role of a balance sheet in determining the financial position of a company is very crucial. It informs both the internal management and the outside investors and creditors to make informed decisions.