Balance Sheet – a Part of Financial Statement
Companies in India produce three important financial statements that are being reflected in their business activities and in their profitability table. These financial statements are reflected in each accounting period. The most important financial statements are – the balance sheet, the income statement, and also the cash flow statement. So, we see the balance sheet comes under the financial statement.
The difference does not end here, we will discuss what is a balance sheet and what the financial statement is in this content with a detailed comparison chart under the heading ‘Balance sheet Vs Financial Statement’ which will discuss the difference between balance sheet and statement of affairs.
What is a Balance Sheet?
A Balance sheet is a representation of the assets, liabilities, and equity contents of the entity. This statement is outlined by all the enterprises, the sole proprietorship firm or a partnership enterprise. The balance sheet also reveals the financial security of the enterprise.
There are two heads while preparing a Balance sheet, they are – assets, equity, and liabilities. Under the assets, all the current assets and all the non-current assets of the enterprise are recorded while the equity and the liabilities head will cover all the shareholder’s equity and all the current and non-current liabilities of the firm.
Formula Used for a Balance Sheet
The balance sheet uses the following accounting equation, where the assets on one side, and the other side it has liabilities in addition to the shareholders' equity, on the other hand, balance out:
Assets = Liabilities + Shareholder’s Equity
Contents of the Balance Sheet:
The business's balance sheet is been classified under one of these three categories:
Assets
Liabilities
Owner Equity.
The balance sheets also include the addition of the "notes" section which holds relevant information that does not fit under any accounting categories.
What is a Financial Statement?
A statement that documents the economic pursuits of the enterprise which is in respect of the trading concern is known as the financial statement. Financial statements present a detailed view of the solvency and the data of the enterprise. A financial Statement is being publicly documented during the closure of the financial year; this will permit the stakeholders to be aware of what type of performance is shown by the enterprise. Financial statement guarantees the investors and creditors to comprehend and understand how exactly their capitals have been employed throughout the financial year.
Using The Financial Statement Information
Investors and financial analysts or even outsiders rely on the financial data to analyze and judge the performance of a company and thereby make their own predictions about the future direction or flow of the company's stock price. One of the most important resources of reliable and audited financial data is the annual report that contains the firm’s financial statements drafted in it.
These financial statements are used by the investors, by market analysts, and also the creditors which help them to evaluate a company's financial health and their earnings potential. The three major types of financial statement reports are the balance sheet, income statement, and the statement of cash flows.
Financial statements include a balance sheet that reflects the financial standing which is recorded as per the date of the financial statements; the profit and loss statement that describes the formation of the operating result; a cash flow statement depicting the company or describing the acquisition and disposal of funds during the accounting period.
Difference Between Balance Sheet and Financial Statement
The accounting information is a report which is in the form of a financial statement. The financial statement is actually the final outcome of the accounting process which is prepared as per the basic accounting principles, by the concepts, and by its assumptions. A financial statement helps to draw financial conclusions on the company’s profitability status, efficiency, performance, and position. These statements are furnished in such a way that the users of the financial statement can understand them easily and thereby take decisions. This includes a profit & loss account, balance sheet, and also cash flow statement.
While, Balance Sheet, on the other hand, is a statement that sets out the ownership and the owning of the company, at a certain determined date. The balance sheet represents the assets, liabilities, and capital of the enterprise. Balance Sheets are prepared either in horizontal or in a vertical format.
Here we present a different chart that will distinguish between the Balance Sheet and Financial Statement clearly.
Point of Difference | Balance Sheet | Financial Statement |
Meaning | A Balance Sheet is a statement that depicts the financial condition of a particular enterprise. | Financial Statement records the track of all the financial pursuits of the trading enterprise. |
Objective of Preparing | To represent the enterprise’s assets and liabilities which it owed to its respective users. | It presents a view of the enterprise operation to their own users. |
Scope | This is narrow. | This is wider. |
Represents what? | Represents financial condition at a particular date. | Represents the financial status of the concern quantitatively. |
What does it reveal? | Reveals the assets owned and the liabilities owed by the entity. | Reflects the financial health of the enterprise. |
Part of | The Balance Sheet is a part of the financial statement. | Not a part of the Balance Sheet. |
FAQs on Balance Sheet Vs Financial Statement
1. What is the primary purpose of a Balance Sheet in financial accounting?
The primary purpose of a Balance Sheet is to provide a snapshot of a company's financial health at a specific point in time. It details what the company owns (assets), what it owes (liabilities), and the owners' investment in the business (shareholders' equity). This statement helps stakeholders understand the company's financial position and structure.
2. What does a typical set of financial statements include?
A typical set of financial statements generally includes several core reports that provide a comprehensive view of a company's financial performance and position. These usually are:
- The Income Statement (also known as Profit & Loss Account), which shows revenues and expenses over a period.
- The Balance Sheet, which outlines assets, liabilities, and equity at a specific date.
- The Cash Flow Statement, which details cash inflows and outflows from operating, investing, and financing activities.
- The Statement of Changes in Equity, showing how the owners' equity has changed.
3. Among the different financial statements, which one is generally considered most crucial?
While all financial statements are crucial for a holistic understanding, the Income Statement is often considered the most crucial by many users. This is because it directly reveals a business's profitability over a period, showcasing its ability to generate revenue and manage expenses effectively. Investors and creditors frequently use it to assess performance and future potential.
4. How is a Balance Sheet different from a general Financial Statement?
A Balance Sheet is actually one specific component of a complete set of Financial Statements. Think of "Financial Statements" as the umbrella term for all the reports that communicate a company's financial data, while the "Balance Sheet" is just one particular type of report within that set. The Balance Sheet shows financial position at a single point, whereas financial statements as a whole provide a broader view of performance and position over time and at a point.
5. Can you explain the key distinctions between an Income Statement, a Balance Sheet, and a Cash Flow Statement?
Yes, these three are distinct yet interconnected:
- The Income Statement (P&L) focuses on a company's financial performance over a period (e.g., a quarter or year) by showing revenues earned and expenses incurred, resulting in net profit or loss.
- The Balance Sheet provides a snapshot of a company's financial position at a specific date, listing assets, liabilities, and owner's equity. It represents the accounting equation: Assets = Liabilities + Equity.
- The Cash Flow Statement tracks the movement of cash, showing how much cash a company has generated and used over a period, categorized into operating, investing, and financing activities.
Together, they offer a comprehensive view of a company's financial health.
6. Why is understanding financial statements important for a business?
Understanding financial statements is vital for several reasons. For a business, these statements provide critical insights for decision-making, allowing management to assess performance, identify areas for improvement, and plan for the future. They also enable external parties like investors, creditors, and government agencies to evaluate the company's financial health, make informed investment decisions, and ensure compliance.
7. Is a Trial Balance considered one of the main financial statements?
No, a Trial Balance is not considered one of the main financial statements. It is an internal document used in the accounting process to ensure that the total debits equal the total credits in the general ledger. It serves as an intermediate step to check the arithmetical accuracy of ledger accounts before preparing the final financial statements like the Income Statement and Balance Sheet.
8. What key accounting concepts or principles influence the preparation of financial statements?
Several fundamental accounting concepts and principles heavily influence the preparation of financial statements, ensuring their reliability and consistency. Key ones include:
- The Going Concern Concept, assuming the business will continue operating indefinitely.
- The Accrual Concept, recognizing revenues when earned and expenses when incurred, regardless of cash flow.
- The Matching Principle, pairing expenses with the revenues they helped generate.
- The Materiality Concept, focusing on information significant enough to influence decisions.
- The Conservatism Principle, suggesting caution in recording revenues and expenses.
These principles guide accountants in presenting a true and fair view of a company's financial position.
