Balance sheet

Nhóm 8
• Hoàng Thị Diễm Quỳnh
• Nguyễn Ngọc Diệp
• Phạm Thị Thu An
• Phạm Minh Anh Thư
DEFINITION
• A balance sheet is a financial statement that reports a company's as
sets, liabilities and shareholders' equity.
• The balance sheet is one of the three (income statement and statem
ent of cash flows being the other two) core financial statements use
d to evaluate a business.
• The balance sheet is a snapshot, representing the state of a compa
ny's finances (what it owns and owes) as of the date of publication.
• Fundamental analysts use balance sheets, in conjunction with other
financial statements, to calculate financial ratios.
• To reveal the financial status of a business as of a specific point i
n time. The statement shows what an entity owns (assets) and ho
w much it owes (liabilities), as well as the amount invested in the
business (equity). This information is more valuable when the bala
nce sheets for several consecutive periods are grouped together,
so that trends in the different line items can be viewed.
• There are several subsets of information that can be used to gain
an understanding of the short-term financial status of an organiz
ation.
Contents

• fixed assets - long-term possessions

• current assets - short-term possessions
• current liabilities - what the business owes an
d must repay in the short term
• long-term liabilities - including owner's or sha
reholders' capital
1. Fixed assets include:
• tangible assets - eg buildings, land, machinery, comput
ers, fixtures and fittings - shown at their depreciated o
r resale value where appropriate
• intangible assets - eg goodwill, intellectual property rig
hts (such as patents, trade marks and website domain
names) and long-term investments
2. Current assets are short-term assets whose value
can fluctuate from day to day and can include:
stock
• work in progress
• money owed by customers
• cash in hand or at the bank
• short-term investments
• pre-payments - eg advance rents
3. Current liabilities are amounts owing and
due within one year. These include:
• money owed to suppliers
• short-term loans, overdrafts or other finance
• taxes due within the year - VAT, PAYE (Pay As
You Earn) and National Insurance
4. Long-term liabilities include:
• creditors due after one year - the amounts due to be
repaid in loans or financing after one year, eg bank or
directors' loans, finance agreements
• capital and reserves - share capital and retained profits,
after dividends (if your business is a limited company),
or proprietors capital invested in business (if you are an
unincorporated business)
Limitations of Balance Sheet:
• The Balance Sheet is not free from Snags. Some of the limitations are:
• 1. The Balance Sheet is prepared on the basis of historical cost and, as such, does not exhibit the c
urrent values. Thus, it fails to convey the true picture about the financial position desired by an anal
yst.
• 2. A Balance Sheet is prepared at the end of a particular period as per the requirements of the man
agement when it shows a very favourable condition. This is particularly applicable in the case of sea
sonal firms.
• 3. Sometimes the historical cost of Balance Sheet does not convey any fruitful information to some
users of accounting information. The same may become useful with the application of ratio analysis.
• 4. Balance Sheet is affected by the accounting policies relating to: Inventory valuation, depreciation
of assets, provision for bad and doubtful debts etc. Thus, it becomes necessary to disclose such poli
cies.
• 5. Sometimes a Balance Sheet cannot exhibit the real value of certain factors which are important t
o the business (e.g. skill, technical experience etc.)
Limitations of balance sheet:
• 6. Sometimes a Balance Sheet is window-dressed which mislead us.
• 7. Value of some current assets (e.g. Stock, Debtors etc.) are valued on the basis o
f some estimates which may not always prove worth in future. Thus, it does not co
nvey the true financial position.
• 8. When there is inflationary situation or change in the purchasing power of mone
y a conventional Balance Sheet particularly misleads us since the assets purchased
at various intervals are added up with the values which has already been changed.
• 9. Balance Sheet is prepared with a lot of schedules of assets and liabilities for vari
ous information; still, that is not sufficient. A detailed list of such assets and liabiliti
es are required for correct analysis and interpretation.
• 10. A conventional financial report based on the conventional Balance Sheet is not
able to throw light on Social Account which is the crying need of the day.