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What is a Balance Sheet and why is it important for your company?

Finance Management

What is a Balance Sheet and why is it important for your company?

Balance Sheet is an important management analysis tool of the business situation, in addition to being a legal requirement. Thus, those entrepreneurs who can interpret it can extract different perspectives on the company’s health, and project future scenarios. It is divided into two large groups, Assets and Liabilities, each containing specific accounts within the accounting piece.

Due to the great relevance that the subject has and considering the difficulty many have in understanding it, we decided to write this article containing important information about the Balance Sheet and its importance for the company. Check out!

What is a Balance Sheet and what is its structure?

Being divided into two large groups (Assets and Liabilities), there is a correct structure to be followed when composing the balance sheet. On the left side, all the company’s assets or rights are listed. It is called Active.

In accounting, assets are everything that the company has translated into monetary values. Some examples are: balance, bank accounts, stock, brands, patents, among others. Rights are values ​​that are not yet in the company’s possession, but there is a provision for them to be converted into cash. These are examples of accounts receivable.

Liabilities are the group in the Balance Sheet that contains all of the company’s obligations, for example:  supplier accounts payable , loans and financing. There is a subgroup, which some experts call the third division of the Balance Sheet, Net Equity. It records the amounts deposited by the partners when establishing the company.

Current or non-current?

There is also a subdivision between current and non-current assets. To understand this, it is important to explain the concept of short and long term in accounting. In this science, everything that is due within the same fiscal year, or calendar year, will be considered short term. And any account due by the end of the following fiscal year will be considered long term.

Put another way, a loan that is paid off by October, even if it was purchased at the start of the year, will be considered short-term. On the other hand, revenue from the sale of a product that is paid for in sixty monthly payments will be considered long-term.

Therefore, until the conclusion of the current fiscal year, all of the assets and rights that can be turned into cash will be included in Current Assets. Additionally, non-current assets are those that eventually have their worth transformed to money. In the aforementioned example, the revenue would be listed as customers receivable in non-current assets.

Liabilities also have this subdivision, with Current being all debt that must be paid within the same year and Non-Current being long-term debts. Bringing the concept to our example, the payments for the purchased computer would be recorded in a supplier account in Current Liabilities.

What is a Balance Sheet for?

The main use of this accounting piece is to demonstrate the financial and equity situation of a company in a given period. It is considered one of the most important statements that accounting provides for the management and administration of a company.

How important is the Balance Sheet for my company?

The Balance Sheet is like a photo of the company at a given period. With it, it is possible to extract a series of financial analyzes and verify several different situations. For example, you can check the balance of receivables that your company has at the end of a fiscal year.

The Balance Sheet provides the accounting value of assets recorded in Fixed Assets (Cars, land, machinery, etc.). It shows the depreciation of these assets over time and their residual balance. It is also possible to analyze the value of outstanding suppliers that your company has, in addition to monitoring balances to be paid on loans and various financing.

In a more advanced analysis, carried out by a good accountant, it is possible to check the evolution of your company’s finances and assets, comparing the current period with previous years.

How to prepare a company’s balance sheet?

The Balance Sheet is prepared by combining all accounting entries made in the company during the year. It is basically the record of all inflows and outflows of resources, purchases of goods and assets that occurred in a given period.

As this is a piece with a certain level of technical complexity, it must be prepared by a duly qualified accountant registered with the class council.

Is it mandatory to create a Balance Sheet?

In addition to being a fundamental piece in the financial and asset analysis of companies, the Balance Sheet is a legal requirement provided for in Article 1,179 of the Civil Code of 2002. Thus, every legally constituted business must, under penalty of suffering sanctions, present its Balance Sheet by the date required in the aforementioned rule.

What are the penalties for not submitting the Balance Sheet on time?

A business that violates the legal requirement to compile and record the balance sheet may be subject to various administrative penalties, as well as being excluded from tenders and public agencies.

It is crucial to note that, as was already the case with real profit, as of 2016 businesses under the presumptive profit taxation regimes must submit their balance sheets via the Public Digital Bookkeeping System (SPED) or Digital Accounting Bookkeeping (ECD). The company may be fined if it doesn’t fulfil this responsibility.

What is the relationship between the Balance Sheet and accounting?

The Balance Sheet is completely related to a company’s accounting. After all, as mentioned in this article, the accountant is the competent professional responsible for preparing this document.

Furthermore, the accountant has the necessary knowledge to show the entrepreneur the interpretations and insights that this demonstration can provide. Based on this information, the accountant will be able to instruct and provide guidance to managers on actions that can be taken to reduce potential problems or improve the financial health of a company.

Accounting   is no longer a bookkeeping service or a simple tax issuance. With the analysis of the Balance Sheet, the accountant has an incredible management tool. And entrepreneurs who use this tool certainly see many positive results in their business .

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