Finance Management

What is a Balance Sheet and How to Do It

admin • 17 Sep 2023

Furthermore, it also serves as support so that every business can improve its decision-making and financial management.

So, in this post, we will explain in detail what it is, what its structure is, the calculations that are part of it, how to analyze it and more tips! Follow along and learn how to simplify this process in your business!

What is a Balance Sheet?

The balance sheet is an accounting document, like the DRE , that informs the situation of all of a company's assets. This includes your assets, rights and obligations, as well as investments and sources of funds.

With this report, it is possible to better understand the financial position of the business within a given period. To do this, all the company's records are investigated, that is, all the accounting facts that appear in the company's daily book.

What Is the Purpose of the Balance Sheet?

The purpose of the balance sheet is to provide a clear and accurate view of a company's financial position at a given point in time.

It helps to understand the composition of assets, liabilities and equity, allowing you to assess the liquidity, solvency and profitability of the business. Therefore, it is a fundamental tool for analysis and strategic decision-making.

What is a company's balance sheet for?

In addition to being an obligation provided for by the Civil Code for most companies, the balance sheet is extremely useful.

Even if your company is small, this survey helps you see your financial situation more clearly, accurately and transparently. This way, it is possible to guarantee better conditions to manage a business.

In summary, the balance sheet 's main function is to provide an accurate picture of the company's accounting and financial situation in a certain period. And this balance is generally done over a period of one year.

It is considered one of a company's main financial statements and must be produced accurately and rigorously. The idea is to enable efficient asset control.

From the report, it is possible to clearly view the inflows and outflows of money, in the following ways:

• Indicating the moment of the company;
• Identifying debt capacity, profitability, growth and investments;
• Facilitating decision making and creating accurate plans based on data.

In addition, it is also widely used to carry out strategic planning for companies.

How Important Is the Balance Sheet?

The balance sheet is a report of great importance for the management of a company.

Firstly, it is essential for it to carry out its activities in accordance with the legislation. But, in addition, it can also serve as a basis for an analysis of the company's financial health.

From this, it is possible to make smarter decisions about the business. After all, the document indicates whether the company is having a positive or negative result.

This is the starting point for a series of decisions that can be made, depending on the result.

The manager may decide, for example, that it is necessary to cut some costs to balance the accounts. It is also possible to point out when to make new investments, such as hiring new people, buying new machines, etc.

As we have seen, some companies must prepare the balance sheet annually. Others quarterly. But management does not need to stick to this periodicity.

This is because companies that wish to have greater control over their finances can prepare the document more frequently.

How Does the Balance Sheet Work?

The balance sheet has a simple structure, with just three main pieces of information: assets, liabilities and equity.

So, in practice, it has a table format, with two columns. On the left are assets, which are goods and rights. On the right, there are liabilities and obligations related to equity.

Due to this table structure, the analysis of the balance sheet is very objective, giving the manager a summary of the company's financial health. But even so, it provides information that can be valuable for decision making.

What are the advantages of using the balance sheet?

The main advantage of using the balance sheet is having a realistic view of the company's financial health without having to analyze large reports.

In other words, the balance sheet offers an overview of what is happening with the finances.

Thus, management can make decisions based on data , understanding the best time to hold back on spending or make new investments.

From the document, the manager can also choose some aspects of financial management to deepen their analysis. This is because he will know which points need greater control for the company to have a healthy financial life.

When to Make a Balance Sheet?

Due to its importance, the balance sheet is one of the main financial statements made by the company. Therefore, for greater efficiency, it is generally done every 12 months, at the end of the year.

Therefore, detailed control of information must be carried out. Ideally, when producing the balance sheet at the end of the year, all information is included in detail in the annual control.

What to Analyze in a Balance Sheet?

One of the advantages of the balance sheet is the possibility of carrying out different analyses. Just the way this report is put together generates a quick answer as to whether or not your company will be able to meet the commitments made.

In other words, it is possible to carry out various analyzes based on the balance sheet . One of the best is whether the amount of liabilities for the period could be detrimental to your company's financial growth.

What Is the Structure of a Balance Sheet?

Basically, the balance sheet reports the company's assets, liabilities, and net worth for a given period.

See more about each of them below:

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Assets on the balance sheet are everything your company has of value that can be converted into cash.

The accounting report will list assets in order of liquidity, meaning how easily they can be converted into cash. Within assets there are two categories:

• Current Assets: can be converted into cash within a short period of time. Examples include cash, accounts receivable , inventory, marketable securities, etc.
• Long Term Assets: These cannot be converted into cash in the long term. They include fixed assets (property, buildings, machinery and equipment), and intangible assets, which are not physical objects, such as franchise agreements and patents.

Liabilities

A company's Liabilities are the financial responsibilities it has, including recurring expenses , loan payments and other forms of debt.

Like assets, liabilities are also subdivided into two categories:

• Current Liabilities: rent, interest and payroll payments, taxes, etc.
• Non-Current Liabilities: long-term loans and deferred income taxes. It also includes all obligations that must be paid within a period of more than 12 months.

Net worth

Net Equity is the difference between total assets and total liabilities. It refers to the amount of money generated by a company; the amount of money put into the company by its owners (or shareholders).

The relationship of these items is expressed in the following equation:

Assets = Liabilities + Equity

The total value of the asset must be equal to the total value of the liability added to the net equity. But, if this doesn't happen, you need to go back and look for where the error is.

What Are the Types of Balance Sheets?

There are two main types of balance sheets : the vertical balance sheet and the horizontal balance sheet .

The vertical balance sheet presents the values ​​of assets, liabilities, and equity as a percentage of total assets. This allows for an analysis of the company's financial structure and the identification of trends over time.
The horizontal balance sheet shows the values ​​of assets, liabilities and equity in different periods of time, usually in adjacent columns. This allows for direct comparison and analysis of changes over time.

Both types of balance sheets are useful for assessing a company's financial health and providing valuable information for financial analysis and planning.

How to Create Your Company's Balance Sheet in 5 Steps?

Creating your own business's balance sheet is really not a very easy task. But, if you've made it this far, you already have the necessary information to be able to develop your accounting report.

See the main steps to prepare your balance sheet

1 – Determine a Period

As you already know, the balance sheet shows the company's financial situation within a specific period. So, the first step is to determine the reporting date.

In general, the balance sheet is always prepared every 12 months. Publicly traded companies, for example, do it every three months.

2 – Score Your Assets

With the date set, you need to consider and account for all your assets within that period.

To make analysis easier, consider listing assets as individual assets and total assets.
It is much more complex to understand the report when assets are divided into different line items.

Two groups divide the assets:
Current Assets:

• Cash and cash equivalents;
• Bills to receive;
• Short-term negotiable securities;
• Others.

Non-Current Assets:

• Long-term negotiable securities;
• Intangible assets;
• Property;
• Others.

Both current and non-current assets must be subtotaled and added together.

3 – Score Your Liabilities

Identify the company’s obligations to third parties. They are also divided into two groups, just like assets:

Current Liabilities:

• Rent;
• Interest payments;
• Accumulated expenses;
• Others.

Non-Current Liabilities:

• Long-term loans;
• Deferred income taxes;
• Long-term debts;
• Others.

Just like your company's assets, liabilities need to be subtotaled and then added together.

4 – Calculate Net Worth

In this step you need to list the accounts that indicate the book value of your company. To be simpler, consider, for example, share capital, accumulated profits, cash flow , among others.

Is the company private? If it is owned by a single owner, it will be simpler to calculate the net worth.

Now, if we are talking about a publicly traded company, this calculation may become more complicated. See some examples of net worth below:

• Share capital;
• Capital reserves;
• Profit reserves;
• Actions in Treasury;
• Others.

5 – Compare Total Liabilities and Equity with Assets

With the balance sheet equation , a balance is expected between assets and the amount of liabilities.

But, to do this, you need to prepare the report like this:

On the left side, we have the assets. On the right side, there are liabilities and equity.

Values ​​are always grouped into accounts and their order is determined by the liquidity situation. This is because this way, it is easier to analyze the report.

How to Calculate Net Equity on the Balance Sheet?

To calculate net worth on the balance sheet , you need to subtract total liabilities from total assets.

By subtracting liabilities from total assets, you obtain the value of shareholders' equity, which represents the portion of the company's assets that belongs to shareholders or owners.
This value reflects the net value of assets after deducting all liabilities. In other words, it is the residual value that would be left to the owners if all assets were sold and all debts were paid.

How to Carry Out a Balance Sheet Analysis?

Balance sheet analysis involves evaluating the components of the balance sheet to understand the financial health and condition of the company. Here are some steps to perform the analysis:

• Evaluate the structure and composition of assets: Analyze different types of assets, such as cash, accounts receivable, inventories and investments. Check that the company has a solid asset base and that they are balanced.
• Analyze liabilities: Examine liabilities such as accounts payable, loans, and tax obligations. Check whether the company has a sustainable level of debt and whether it can meet its obligations.
• Calculate financial ratios: Use financial ratios, such as current liquidity, dry liquidity, debt and profitability. The idea is to obtain a more detailed view of the company's financial situation and its ability to generate profits.
• Compare with previous periods and the sector: Make comparisons with the company's previous balance sheets to identify trends and changes. Additionally, compare the numbers with those of the industry in which the company operates to assess its relative performance.
• Identify strengths and weaknesses: Based on the analysis, identify the company's strengths, such as good liquidity or profitability. Also, look for weaknesses, such as high debt levels or low operational efficiency.
• Make informed decisions: Use the insights gained from analysis to make informed decisions about investments, financing, growth strategies and improvements in the company's financial operations.

Remember that balance sheet analysis must be done in conjunction with other financial information and metrics. The idea is to obtain a comprehensive view of the company's financial health and performance.