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The Balance Sheet Tells Much About Your Business


A balance sheet is a quick picture of the financial condition of a business at a specific period in time. The activities of a business fall into two separate groups that are reported by an accountant. They are profit-making activities, which includes sales and expenses. This can also be referred to as operating activities.

There are also financing and investing activities that include securing money from debt and equity sources of capital, returning capital to these sources, making distributions from profit to the business owners, making investments in assets and eventually disposing of the assets in the manner best suited to meet regulatory guidelines.

Profit making activities are reported in the income statement; financing and investing activities are found in the statement of cash flows. In other words, two different financial statements are prepared for the two different types of transactions. The statement of cash flows also reports the cash increases or decreases from profit during the year as opposed to the amount of profit that is reported in the income statement.

The balance sheet is different from the income and cash flow statements which report, as it says, incoming of cash and outgoing cash. The balance sheet represents the balances – or amounts – of a company’s assets, liabilities and owners’ equity at an instant in time. The word balance has different meanings at different times.

Balance, as it is used in the term balance sheet, refers to the balance of the two opposite sides of a business, total assets on one side and total liabilities on the other. However, the balance of an account, such as the asset, liability, revenue and expense accounts, refers to the amount in the account after recording increases and decreases in the account, just like the balance in your checking account.

Accountants can prepare a balance sheet any time that a manager requests it. But they’re generally prepared at the end of each month, quarter and year. It’s always prepared at the close of business on the last day of the profit period. It can also be prepared quarterly, as a matter of course; and it is usually prepared in conjunction with a profit and loss statement.

Keeping an Attentive Eye on Gains and Losses


It would probably be ideal if business and life were as simple as producing goods, selling them and recording the profits. But there are often circumstances that disrupt the cycle, and it’s part of the accountant’s job to report these as well. Changes in the business climate, or cost of goods or any number of things can lead to exceptional or extraordinary gains and losses in a business.

Some things that might alter the income statement can include downsizing or restructuring the business. This used to be a rare thing in the business environment, but is now fairly commonplace. Usually it’s done to offset losses in other areas and to decrease the cost of employees’ salaries and benefits. However, there are costs involved with this as well, such as severance pay, outplacement services, and retirement costs.

In other circumstances, a business might decide to discontinue certain product lines. Western Union, for example, recently delivered its very last telegram. The nature of communication has changed so drastically, with email, cell phones and other forms, that telegrams have been rendered obsolete. When you no longer sell enough of a product at a high enough profit to make the costs of manufacturing it worthwhile, then it’s time to change your product mix.

Lawsuits and other legal actions can cause extraordinary losses or gains as well. If you win damages in a lawsuit against others, then you’ve generated an extraordinary gain. Likewise if your own legal fees and damages or fines are excessive, then these can significantly impact the income statement.

Occasionally a business will change accounting methods or need to correct some inevitable errors that had been made in previous financial reports. Generally Accepted Accounting Procedures (GAAP) require that businesses make any one-time losses or gains very visible in their income statement; so it is important that small business as well as major corporations pay close attention to these principles.