Balance sheets have two types. Which one should be chosen based on suitability?

For entrepreneurs and investors, understanding the balance sheet is an essential financial skill. The balance sheet provides a clear overview of the company’s financial health. Additionally, it can be compared with industry peers to assess the company’s financial position. There are two types of balance sheets, differing in presentation and format, each with its own advantages and limitations to consider.

What is a Balance Sheet? Key Components to Know

A balance sheet is a financial report that shows a company’s financial position at a specific point in time. It presents three main types of information: assets, liabilities, and shareholders’ equity. The unique feature of the balance sheet is that it shows how much financial resources the company has and where those resources come from.

Management can use the balance sheet to assess the strength of the company’s financial position. Investors can use it to evaluate growth potential before making investment decisions. It also helps analyze strengths and weaknesses, leading to better strategic development.

Calculation Equation and Balance in the Balance Sheet

The balance in the balance sheet stems from the fundamental equation:

Assets = Liabilities + Shareholders’ Equity

This equation shows that all assets of the company are financed by two sources: debt (liabilities) and equity (shareholders’ funds). Therefore, this document is called a “balance sheet” because both sides of the equation must always be equal.

Each component plays a different role: assets represent resources used to generate income; liabilities are obligations to pay others; shareholders’ equity reflects the net worth that owners and shareholders are entitled to.

Assets, Liabilities, and Shareholders’ Equity

Assets

Assets are resources used by the company to generate revenue and operate. They are divided into two categories:

Current Assets are highly liquid assets that can be converted into cash within one year, such as cash, trade receivables, inventory, and prepaid expenses.

Non-current Assets are less liquid and cannot be converted into cash within one year, including land, buildings, machinery, long-term investments, patents, and copyrights.

Liabilities

Liabilities are the company’s obligations to external parties, divided into:

Current Liabilities are payable within one year, such as trade payables and short-term loans payable within the year.

Non-current Liabilities are payable over a period longer than one year, such as long-term bank loans and bonds payable.

Shareholders’ Equity

Shareholders’ equity is the net assets or the residual interest after deducting liabilities from assets. It includes:

Share Capital contributed by shareholders.

Retained Earnings (or Losses) accumulated profits over the years after dividends are paid, or accumulated losses if any.

Two Formats of Preparing a Balance Sheet: How Do They Differ?

There are two formats for preparing a balance sheet, differing mainly in presentation. Management should choose the appropriate format based on the company’s needs.

First Format: Accounting Format

The accounting format is the most popular because it is easy to read and understand. It displays assets on the left side and liabilities plus shareholders’ equity on the right, resembling a T-shape, hence called the T-form.

Steps to prepare an accounting balance sheet:

1. Write the header with the company name, “Balance Sheet,” and the date.

2. List all assets on the left, totaling the assets.

3. List all liabilities and shareholders’ equity on the right, totaling those.

4. Ensure both sides balance, with equal totals.

Advantages: Immediate clarity of balance. However, limited space may make it look cluttered.

Second Format: Report Format

The report format presents items sequentially by account categories, divided into three sections from top to bottom: Assets, Liabilities, and Shareholders’ Equity.

Steps to prepare a report balance sheet:

1. Write the header as above.

2. List “Assets” and detail all items, then total assets.

3. List “Liabilities and Shareholders’ Equity,” starting with liabilities, then equity, and total both, which should equal total assets.

Advantages: Space-efficient and easy to read from top to bottom, suitable for printing and filing.

Comparison of the Two Formats

The accounting format emphasizes immediate visual balance, suitable for management and shareholders. The report format emphasizes sequential reading, ideal for annual reports and detailed analysis. Most organizations prefer the report format as it aligns with international financial reporting standards.

The Importance and Effective Analysis of the Balance Sheet

The balance sheet, or statement of financial position, is a tool that helps users make informed decisions.

Liquidity analysis: Evaluates the company’s ability to pay debts on time by comparing current assets and current liabilities. A high ratio indicates sufficient cash flow for short-term obligations.

Profitability analysis: Assesses how the company generates profit, considering changes in shareholders’ equity relative to profits earned.

Solvency analysis: Evaluates whether the company can meet short- and long-term debt obligations, using ratios like debt-to-asset or debt-to-equity.

Trend analysis: Comparing balance sheets over multiple periods reveals growth or decline trends.

Changing the Name from “Balance Sheet” to “Statement of Financial Position”

The original term “Balance Sheet” emphasizes only the “balance” of figures but does not convey the content and purpose clearly. The international standard IFRS renamed it “Statement of Financial Position,” reflecting a clearer meaning—that it shows the company’s financial standing beyond just balance.

Thailand’s accounting standards have adopted this change, now calling it “Statement of Financial Position” to align with international standards and improve user understanding.

How to Access and Read a Balance Sheet Correctly

Where to Find Balance Sheet Data

Investors can view company balance sheets on the official database at Datawarehouse.dbd.go.th, managed by the Department of Business Development.

Steps to find a balance sheet:

• Visit Datawarehouse.dbd.go.th

• Select “Legal Entities and Financial Statements”

• Enter the company name

• Choose the “Financial Data” tab

• Select the fiscal year, type of financial statement, analyze ratios, compare year-over-year, or compare within the same industry.

How to Read a Balance Sheet

• Start with understanding: Remember that a balance sheet shows a snapshot at a specific date, not real-time data.

• Understand the structure: Assets are resources, liabilities are obligations, and equity is net worth.

• Analyze details: Examine changes in each category to understand where the company spends and sources its funds.

• Compare over time: Collect multiple periods’ balance sheets to observe trends and financial changes.

Cautions and Limitations in Using the Balance Sheet

While useful, the balance sheet has limitations:

• Historical data: It reflects only a specific point in time; significant changes after that are not shown.

• Data reliability: Errors in recording or intentional manipulation can distort figures. Verification and professional advice are recommended.

• External factors: Economic conditions like inflation, interest rate fluctuations, or currency exchange rates can affect comparability.

• Analysis limitations: It shows numerical data but not qualitative factors such as management quality, customer satisfaction, or technological risks.

Summary

There are two types of balance sheets: accounting format and report format, differing mainly in presentation but containing the same core information—assets, liabilities, and shareholders’ equity.

Both are vital for management, investors, and stakeholders. Management uses them for financial assessment and strategic planning; investors evaluate growth potential; the public uses them for business decisions.

However, relying solely on the balance sheet is insufficient. It should be complemented with other financial statements like the income statement, cash flow statement, and financial ratios to obtain a comprehensive view of the company’s financial condition and performance. This integrated approach supports more accurate and appropriate investment and business decisions.