The term balance sheet refers to a book with substantial information about the financial status of a particular company. This balance sheet reflects all activities, goods, services, transactions, among others, carried out by a commercial organization over the course of a year. This financial situation is used to present a report to the State when making the corresponding tax payments, as well as providing information of great sensitivity to potential investors.
An overall balance sheet has three main elements to consider: assets, liabilities and equity. The first contains all the rights owned by the company, as well as the different elements of its ownership used to offer its goods and services; thus, for example, a vehicle, a building, a particular machine, become part of this group, either adding or subtracting. In the second case, the liability groups all the company’s obligations and debts; thus, for example, the taking of credit or the outstanding payment for a purchase must be registered in this group. Finally, equity represents the difference between liabilities and assets, and the latter must always be positive, except in exceptional cases such as a state-owned company with a deficit maintained by the state.
There have been some cases in history where some companies caused a fraud by incorrectly recording their status on the balance sheet. In this regard, it is noteworthy that the detailed information defines what actions to take with the company at a social level , and therefore it must always be reliable, a circumstance that requires to be performed by a person accredited as an accountant. The reasons that can lead a company to carry out the falsification of information are exemptions or limitations on the payment of some type of tax , or even the intention to reach the share price in the case of a corporation .
In the investment world, it is important to know how to correctly read a company’s balance sheet in order to have a certain value. Thus, according to the elements present, you can determine whether a share is expensive or cheap, considering the value entered in the book against what is offered in the market. This direction points to the so-called fundamental analysis, an asset weighting system that is often used to trade on the stock exchange. That is why companies that are listed on the stock exchange must make their balance sheets public to provide transparency to investors who wish to buy their shares.