Understanding What A Balance Sheet Is

A balance sheet gives you a picture of how your business is doing financially at a given period of time. Usually, it is the accountant that prepares the balance sheet. In a balance sheet, the activities of the business are classified into two groups. These are the profit-making activities, also known as operating activities and the financing and investing activities. Profit-making activities consist of the business’s sales and expenses. On the other hand, the activities that fall under financing and investing include securing money from debt and equity sources of capital, returning capital to equity sources, profit distribution to owners, asset investments as well as asset disposal.

The activities that fall under profit making are reflected on the income statement while the cash flow statement reports the activities under financing and investing. Compared to an income statement, the statement of cash flows shows the increase or decrease in cash flows from profit during a particular year. Simply put, each of these two financial transactions falls on two separate financial statements.

You should not confuse a balance sheet with a cash flow and income statement. Many people confuse these to be one and the same. However, there is a big difference between a balance sheet and a cash flow and income statement. The latter shows the business’s cash inflow or outflow. The balance sheet, on the other hand, merely represents a balance between debit and credit transactions, which include the company's assets, liabilities and owners' equity at a particular business period.

The word balance, as used in the balance sheet connotes a different meaning. As in a balance sheet, it presents a balance between the two opposing fronts of the business namely, the total assets on one front and total liabilities on the other front. However, assets, liabilities, revenues and expenses, all of which that make up the balance of an account, refers to the amount that is reflected after increases or decreases have been recorded in the account. This is just similar to the balance reflected in a checking account.

Generally, a balance sheet is prepared quarterly or annually, at the end of every month. It is prepared at the close of business, usually on the last day of the profit period. However, an accountant can also prepare a balance sheet as per request by the business manager. An accountant is the only one licensed to prepare the balance sheet. Also, it always has to be accurate, true and correct. This is in order to uphold transparency, accuracy and accountability, which are the very core principles in accounting.