The balance sheet reflects the assets and liabilities of the company at a specific point in time. Shows what the company owned on a particular date when the balance sheet was built, and what it had a value. Assets must always be equal to the sum of liabilities and equity of the company. You must also realize, that all financial statements in its wake are reflected in the balance sheet.
Have you noticed one thing?
If you the financial statements of the company show to the experienced Manager, he immediately looks at to the profit and loss account. He is, or should be, responsible for these report items. Managers know that this statement reflects their performance.
And now let we give the same set of documentation to the experienced investor, or bankers. Where they will watch first? You guessed correctly. In the balance sheet! Then look to the profit and loss account and cash flow statement. However, always eventually returns to the balance sheet. Why is this so? Why do financial professionals pursue primarily other statements than managers? Most likely this is because:
- Understanding the balance sheet requires a deeper knowledge and understanding of the finance, than understanding profit and loss account. In addition, you need to understand what each category covered, you must know their mutual bind.
- Understanding the balance sheet is more difficult, there is not as intuitive, as is the profit and loss account.
- Managers in companies must do the budgets, focusing on income and expenses. And those are more or less assigned at the profit and loss account. Therefore, the managers also it better understands. In the budgetary procedure, not occurred the balance sheet data so much.
Let me say consequently that the balance sheet is a statement of what the company owns, and what is owed what in a particular moment in time. The difference in what the company owns and owes what appears in its core capital.
The company has two basic objectives:
- Increase a profitability
- Increase a shareholder’s capital
Both of these goals are interdependent.