Two types of balance sheets that managers need to know - from accounting statements to reports

How is the balance sheet important, and why is it necessary to know that there are 2 types of balance sheets—the accounting form and the report form? The difference between these two is not trivial, as choosing the appropriate format can communicate the company’s financial position more clearly. Let’s understand this in detail and apply it to manage your business effectively.

Meaning of the 2 Types of Balance Sheets and Basic Equation

Before discussing the two types, it’s important to understand what a Balance Sheet or Statement of Financial Position is. It’s a financial document that reflects the overall financial health of a company at a specific point in time.

The fundamental equation of the balance sheet is:

Assets = Liabilities + Equity

This equation must always balance, which is why it’s called a “balance sheet.” The difference between the 2 types of balance sheets lies in how this information is presented on paper (or spreadsheet): the T-account format versus the hierarchical report format.

Main Components of the Balance Sheet – Assets, Liabilities, and Equity

Whether it’s the accounting form or the report form, both have three basic components:

Assets

Assets are resources the company has acquired, used in operations, and generate income. They are divided into:

• Current Assets – Cash, accounts receivable, inventory, prepaid expenses that can be converted into cash within 1 year
• Non-Current Assets – Land, buildings, machinery, long-term investments, copyrights, which generate income over several years

Liabilities

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

• Current Liabilities – Trade payables, short-term debt due within 1 year
• Non-Current Liabilities – Long-term loans, bonds payable, which are due after more than 1 year

Equity

Equity is the residual interest after deducting liabilities from assets. It includes:

• Capital invested by shareholders (initial investment)
• Retained earnings (profits from previous years not distributed as dividends) or accumulated losses

The Two Formats of Balance Sheets – How to Choose

There are 2 formats used in practice: the accounting form and the report form. Each has its characteristics:

First: Accounting Format (T-Account Format)

The accounting format displays data in a T-shape, with assets on the left and liabilities plus equity on the right.

Steps to prepare:

1. Write the header (company name / “Balance Sheet” / date)
2. On the left: list all assets and total them
3. On the right: list liabilities and equity, then total
4. Ensure both sides are equal

Advantages: Easy to read and understand; clearly shows the balance.

Limitations: May not be suitable for formal reports submitted for approval.

Second: Report Format

The report format presents data in a hierarchical order, listing assets first, then liabilities, then equity, in a vertical sequence.

Steps to prepare:

1. Write the header (company name / “Balance Sheet” / date)
2. List “Assets” with details and total
3. List “Liabilities” first, then “Equity,” and total both sides
4. Confirm that total assets = total liabilities + equity

Advantages: Suitable for official financial statements and public disclosures.

Limitations: Requires reading in sequence to understand the balance.

From “Balance Sheet” to “Statement of Financial Position”

The term “Balance Sheet” (Balance Sheet) simply indicates that both sides balance but doesn’t specify the document’s purpose or format. According to international financial reporting standards (IFRS), the name has been changed to Statement of Financial Position to better reflect its meaning.

Why Know About the 2 Types of Balance Sheets?

Managers, shareholders, and investors need to understand both formats because:

• Liquidity analysis: Can the company pay its short-term obligations? By comparing current assets and current liabilities
• Profitability assessment: Investors evaluate how well the company generates profits and increases assets for owners
• Comparison with competitors: Use financial ratios to analyze the company’s position relative to others in the same industry
• Strategic planning: Management uses balance sheet data for financial planning, capital management, and expansion

How to Read Both Types of Balance Sheets Effectively

When you receive a balance sheet, follow these steps:

1. Check the header – Confirm the date, company name, and format (accounting or report)
2. Familiarize with main items – Study assets, liabilities, and equity
3. Analyze the format – For accounting format, look for the two balanced sides; for report format, review the hierarchical order
4. Calculate ratios – e.g., current ratio, debt ratio
5. Compare with previous periods – To track financial trends

Important Reminders When Reading a Balance Sheet

Even after understanding the 2 formats, keep in mind the limitations:

• Historical data: The balance sheet shows a snapshot at a specific date, not real-time data
• Potential manipulation: Some companies may adjust figures to improve appearance; cross-check with income statement and cash flow statement
• External factors: Economic conditions, inflation, interest rates can affect ratios and comparability
• Accounting standards: Different countries may have varying standards, affecting comparability

Where to Find Company Balance Sheets?

Investors interested in reviewing company balance sheets can access them at Datawarehouse.dbd.go.th, the official database of Thailand.

How to search:

1. Visit Datawarehouse.dbd.go.th
2. Select “Business Data and Financial Statements”
3. Enter the company name
4. Choose the “Financial Data” tab
5. Select the desired year and compare data accordingly

Summary

Balance sheets come in 2 formats: the accounting form and the report form. Both provide the same information but differ in presentation style. The accounting form is straightforward and suitable for internal use, while the report form is ideal for official financial reporting.

Regardless of the format, the balance sheet is a vital tool that helps managers, shareholders, and investors understand the company’s financial position. However, it should be used alongside other financial statements like the income statement and cash flow statement to get a complete picture and make informed investment decisions.