The Balance Sheet
Although the balance sheet was first implemented just a couple of centuries ago, it has quckly developed and sophisticated to become nowadays a widely used and powerful tool in the hands of professional users, well known and popular even among the mass public.
In spite of its prominence, or may be because of it, the balance sheet can not be easily and fully described in a few words, but still, if we leave aside its various functions and forms and any other subjective factors, we can state that the balance sheet is a summary of an enterprises’ assets, liabilities and equity at a specific moment of time. To simplify this description even further we could say that the balance sheet shows an entity’s possessions, obligations and others’ debts to it.
The “objective” point of view however is often too restrictive, and the most simple things many times prove to be rather complex…
Among the thousand more complex definitions appended to the balance sheet one of my favorites is the definition given by …. according to which the balance sheet is a statement meant to communicate information about the financial position of an enterprise at a particular point in time, summarizing the information contained in accounting records in a clear and intelligible form, giving information about the financial state of an enterprise and indicating the relative liquidity of the assets, showing the liabilities of the enterprise (i.e. what the enterprise owes and when these amounts will fall due), able to assist the user in evaluating the financial position of the enterprise, being however only part of the data needed by users. Or to summarize this long description with which I completely agree, I could say that although the balance sheet is one of the most outstanding instruments in the hands of financial analysts, managers, investors and other users, its importance should not be over emphasized, it has to be viewed along with many other documents, and it is far from being the perfect and the “super” financial document.
The Business plan on Balance Sheet and Public Sector Reform
Financial control 1.1 Assess the relationship(s) between a financial system or function and other systems or functions in an organisation Answer: Information and records are of critical importance to the functioning and controlling of systems in general, including organisational systems. Given the central importance of information and records to systems operation, including public sector ...
In order to get a more clear, complete and fair picture of the balance sheet, apart from reviewing the definitions given by the experts in this field, we would need to consider as many sides and issues of the subject as possible. Being objective we should have a look at the etymology of the word “balance”, the history of this document, its theoretical essence and the basic concepts of accounting implied in it, its forms in the accounting practise. In our attempt however not to become “over-objective” or scholastic, we should also review the aims and purposes of the balance sheet and the extent to which they are fulfilled, the users of this financial statement and their contradictory needs, the negative aspects and restrictions of the balance sheet, and finally the trends of its further development. In short, we have to go further into the matter…
The history of the so called financial statements, and the balance sheet among them, can be traced back to Renaissance Italy, where along with the double – entry book – keeping they first evoked to respond to the growing more and more complex needs of the accounting connected with the economic development of the society at that period (expansion of trade activities, development of banking, etc.) and with the transition from the owner – manager model towards limited companies or the breakdown of ownership from control. Obviously these historical events called for the development of new methods and new documents, reflecting the changes.
The Essay on Off Balance Sheet Accounting
Operating leasing is the most common form of off balance sheet financing. With leasing, on the one hand, an entity could acquire the right to use an asset through a rental agreement. On the other hand, the entity could purchase the same asset using external finance. While the two arrangements may result in identical net cash flows to the entity, in the case of a purchase both the asset and the ...
Naturally the word “balance” itself has also an Italian origin (“bilan”, “bilanz”) though it is formed up of two latin words: “bi” – double and “lanx” – scales. Even from here it becomes obvious that the balance sheet is a sheet or summary of two different aspects of one and the same thing: an entity’s financial position.
Further to this aspect, we can take a look at the definition of the balance sheet given by John Arnold, Tony Hope and Alan Southworth: “The balance sheet is the most inituitive and easily understood document of accounting. Most of us at some stage in our lives will be required to compute a listing of our possessions. Such a listing of possessions is a major element in the construction of a balance sheet.”. Far from being a precise statement on what the balance sheet is, it can easily be perceived from a phylosofical and psychological view point, and then, though defined at present times, it can be related with the historical side of the balance sheet. The link is as simple as that: one would generally describe his possessions by listing the things he has and those that should be returned to him, as well as his debts to other people, further more, he would intuitively put those “lists” on the scales to find out what his financial state is, or “to get the balance”. To extend this etimological analogy a bit more, by putting on the different sides of the scales the lists of his possessions and his debts, one would, probably intuitively, measure his financial position with the height difference that would occur between the sides of the scales. Then, in the prossess of separation of the owner from the manager, this way of measurement of a person’s financial state, was naturally transferred into what we now call an enterprise’s balance sheet. Furthermore, the fundamental method of “scaling” possessions and debts continues be the basis of this document.
As we all know a fundamental characteristic of every balance sheet is that the total figure for assets always equals the total of liabilities plus owners’ equity. As we have already seen, actually the above simple equation, representing the theoritical essense of this document, and a basis of its practical side, is the reason for it to be called balance. Actually, the two sides of the balance sheet are merely two views of the same business property.
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Memo To:Mr. Christopher De Maline From: Date:02/17/2014 Re:Personal Budget, Balance Sheet, and Cash Flow Statement Dear Mr. De Maline Saving money is extremely important however; some people do not have healthy savings thus leading them to financial instability. Therefore, being a good steward over your finances should be consistent and begin at an early age and progress as you age. This will ...
Having defined the essence of the balance sheet, in theoretical aspect we have to review the concepts in accordance with which it is built up. Since it is an accounting document, obviously, we would have to find out the application of the basic accounting principles in it. Further to this we can deffinitely state that the balance sheets is in complince with all of the basic accounting principles and concepts.
Let us review some of the most obvious principles that can be referred to the balance sheet:
The entity principle: as in all accounting documents in the balance sheet an enterprise is presumed to exist in its own right. It is therefore treated as a separate entity from the person or persons who own or operate it and in no way reflects their assets or liabilities. The same applies equally to organizations that are not commonly referred to as businesses (charities, clubs, etc.).
The money-measurement concept: obviously everything shown on the balance sheet is measured in money, all pointers that cannot be expressed in monetary terms, being left aside;
The cost principle: I would classify this one as may be the most contradictory principles not only in the financial statements but in the accouning itself. I can even add that it is the reason for some of the negative aspects of the balance sheet. In spite of the different ways in which assets can be valued the accountants have traditionally used the historic cost as the basis of valuation of assets in the balance sheet, assuming that the enterprise is a “going-concern”, and taking into consideration the need for objectivity.
Periodicity principle: being a document, showing the financial position of a firm on a given date, by its very nature the balance sheet has to be drawn at a some periods of time, so there is no way for it not to comply with this principle.
As already mentioned the balance sheet can be easily referred to and found in complience with any other concepts like the accrual concept, the duality concept, the prudence principle, etc.
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To finish with the aspects here referred to as “objective”, we have summarize in short the practical side of the balance sheet. No matter how often it is drawn, and what of the two popular forms it is presented in, the balance sheet, as known, consists of three major parts:
assets – or what the firm possesses and has the right receive in future;
liabilities – or what the firm’s obligations are; shows also how many of these should be returned in the short-run, and how many the enterprise can employ in the long-run;
owner’s equity – the firm’s capital, it can be also figured as the differense between assets and liabilities.
To summarize the theoretical and practical essense of the balance sheet, we can use another contemporary definition of it given by A. Belkaouli in “Accounting theory”: “The balance sheet measures the financial positions at a point in time”. I think the arguments of the author are clear: if we assume that the current financial position can be described with the figures of the firms’ possessions and obligations, listed by types and amounts than we would have to agree that the balance sheet gives us this information.
Obviously, being an indicator of the enterprises’ financial position, the balance sheet is a useful and powerful tool in the hands of managers, financial analysts and external users. Combined with the data on other financial statements it forms different ratios (like short-term liquidity ratios, short- and long- term solvency ratios, asset utilisation ratios and many others), which are the basis of each financial analysis. It is these data that can tell you if a company has enough money to continue to fund its own growth or whether it is going to have to take on debt, issue debt, or issue more stock in order to keep on keeping on. Does a company have too much inventory? Is a company collecting money from its customers in a reasonable amount of time? Once again, it is the balance sheet – the listing of all of the assets and liabilities of a company – that can tell you all of this. And once again, its understanding is crucial for the management of the company, potential investors, and many other users.
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Eastman Kodak Company is one of the world's largest manufacturers of photographic equipment. It develops, manufactures, and markets photographic and chemical products for both amateur and professional photographers. The company's other products include X-ray films, pharmaceuticals, copier-duplicators, acetate fibers, polyethylene, polypropylene, polyester, and videocassettes. Kodak also provides ...
Now, having in mind all afore said, let us view another definition of the balance sheet: “You can not have a more meaningless and confused statement holding a position of such a great importance” (Keron Bhattacharaya, “The accountancy’s faulty sums”).
Interesting opinion…
In order to find out this authors points of view we will have to consider the balance sheet restrictions and limitations and the needs of its users, or at least some of them.
The balance sheet is in essence a list of the assets and liabilities of the enterprise or organization at a point of time. The fact that it represents the position at one point in time is itself a limitation as it is only relevant in that point of time. At any other time a new sheet has to be drawn up. This means that in order for the balance sheet to be useful it should be as up to date as possible, and that its utility diminishes the more out of date it becomes. Similarly, in order that it is an accurate measure of the assets and liabilities should be as up to date as possible, and here lies another limitation.
Another very strong limitation of the balance sheet is the fact that the costs are given in their historical expression. Although, as prevoiusly stated, this has its reasons, still in some cases it blurs the information on the sheet. This is especially true applied to the accounting in high – inflation environment, and is probably one of the reasons for the opinion of the South Asian author – Keron Bhattaraya. But even in normal economics sometimes the assets being stated as a figure which bears little if any relation to the current value (the most obvious example of this in recent years has been the changes in prices and values of land and buildings).
This is a serious contradiction and recently there has been a trend showing assets in public accounts at a valuation rather than at a historical cost.
Another short-coming of the balance sheet is its monetary expression. Little information can be drawn out of it on the enterprises’ activities, the profit of certain investments or managers’ decision, the success of new products, the company employees. It would be impossible however to show all of these in one-sheet summary.
The Business plan on Mission Statement Statements Companies Performance
INTRODUCTION In 1973 Peter Drucker wrote that "mission and philosophy is the key starting point in business" and claimed that the lack of thought and attention given to them as the cause of many frustrations and failures in business. Subsequently Pearce (1982), David (1989), Campbell and Tawadey (1990) and others developed a body of knowledge on mission statements as a strategic tool essential for ...
As I have early pointed the balance sheet itself is a contradictory document also because of the various needs of its numberous users and environments in which it is used.
The activity in which the organization is involved can have dramatic effects on the classification of an asset. What might not be an asset for one business would be an asset of another business, undertaking a different activity. Apart from these cases, which are to some extent reasonably clear cut, the activity can have dramatic effects on the difficulty or otherwise of drawing up a balance sheet. Consider for example the problems of a football club, trying to account for star players; or of a high technology business, trying to decide whether the cost of the patent on a new product is going to yield any future benefit when the state of the art is changing so rapidly.
There are also issues related to the ways in which a business is perceived and the ways in which the management would wish the business to be perceived. For example a research has shown that the management, especially the management of smaller organizations, perceive that the bankers are interested in the amount of assets available as security for a loan or overdraft. There is therefore a temptation to try to enhance the value of assets perhaps by revaluing the land and building prior to applying for a loan. Similarly in a number of cases where a business is in trouble the assets have been revalued in order to bolster the image of the business and to promote the impression of it having a “sound asset base”.
In one word, what seems good and right to me, may not be enough for you.
Still, there are many users to which the balance sheet does not seem confused and is necessary, although they have conflicting needs:
IRS and other government and state institutions. It is probably fair to say that income statements are constructed with the IRS in mind more than any other user. After all, it is the bottom line of the statements that determines what taxes will be due.
Lenders are more interested in balance sheets, although the income statement is not taken lightly. The first question a lender must ask is “What if this loan is not repaid?” The lender will want something to sell to get paid back. A company’s balance sheet tells the lender what there is to sell. So a lender wants a balance sheet that indicates what the company owes (its liabilities) and what it owns (its assets).
Assets include such obvious things as property and cash, but also accounts receivables (what the company is owed) and prepaid expenses (like advances on rent).
Things the company owes (“accounts payable”) include debt and bills yet to be paid, as well as what stockholders put into the business (“stockholder equity”) and retained earnings (profit not paid out to stockholders in the form of dividends or other payments).
Lenders also want to look at the income statement, but they may be more interested in a cash statement. The IRS wants to know how much profit you make, but wants profits to be adjusted to account for depreciation (wear and tear) on assets the company owns. The lender finds that interesting, but the lender will not be comforted by the fact that the $1 million you spend on a new building will be depreciated over 10 years when the loan is for three.
Finally, of course, shareholders want to look at income statements and balance sheets. They give snapshots of the current health of the business. They may be less interested in any one period’s report than the trend. Are profits getting better? Is the balance sheet fatter? That’s because the share value does not have a simple relationship to either the balance sheet or the income statement. The value of a business is based on what someone would pay for it to gain control of the money it will make in the future. The balance sheet gives this potential buyer an idea of how easily the company can finance future growth and weather financial crises; the income statement gives the buyer an idea how much future profits might be. But an investor would need to know a lot of other things before coming to a decision about how much to pay.
For people running the company, the financial statements are just a starting point. The really interesting numbers may not show up on a statement, such as the profit margins on various products, projected sales, or order backlogs. The financial statements pull all these things together, but any analysis of how a company is doing needs a different kind of operational data. The best employee ownership companies share these numbers too.
Now, having reviewed almost all the issues related with the balance sheet, we can say in my opinion that sine its appearance a few centuries ago it has been an important and outstanding financial statement summarizing the financial position of an enterprise at a particular point in time. In the quickly developing technological environemt it might change its form, it might even change some of its principles, it will be viewed along with more and more information in the era of information, but it will keep for some more time its “position of such a great importance”.
Bibliography
Bibliography:
Arnold J., and S. Turley, Accounting for Management Decisions, 3rd ed., 1996, Prentice Hall Europe (UK) Limited, London
Berry A. and R. Jarvis, Accounting in a Business Context, 2edshnvd. ed., 1994, Chapman & Hall, London
Watts J., Accounting in the Business Environment, 2nd ed., 1996, Pitman Publishing, London
Adam, J.H., Longman Dictionary of Business English, 2nd ed., 1989, Longman Group UK Ltd.
