Business finance and accounting is central to any business operation. While business finance provides the center for operation and management, accounting simply provides an historical background of the performance. Organizations rely on different methods of business finance and accounting to manage their business. However, most of financial reporting largely depends on the classification of the business as defined by its formation and its operations. The classification of business includes corporate, partnership, sole proprietorship, governmental organization or Nongovernmental organization commonly referred to as NGOs. All these operations rely on the balance sheet to indicate the present state of the organization or operation. This research paper reviews two articles that define and explain the business terminology of balance sheet. The research paper first provides a succinct summary of the articles under review. The research paper further explains the concept of the balance sheet explaining the key concepts that make up the balance sheet. Finally the research provides ways that a balance sheet might be useful for a health care finance.
Summary of Articles on Balance Sheet
The first article is by Washer and Nippani. (2004). The article explores the relationship between human capital and the balance sheet. According to them, the issue of human capital is often excluded when it comes to business practitioners and textbooks on personal finances when it comes to the construction of balance sheets. To them, human capital is an asset that is a representation of the earning power of an individual the individual can use it to meet their overtime financial needs through liquidating it. Thus, having a balance sheet that represents the human capital is recognition of the important role it plays when it comes to making financial decisions. Besides, they argue that human capital is a justification of increased levels of risk in a portfolio. To them, human capital is a benefit that is projected and therefore it is not a benefit that has already been realized. Therefore, a person’s human capital is just similar to a financial asset, the only difference being that it is not traded. In addition, they add that human capital is assigned a zero value in the conventional balance sheet. They conclude that balance sheet can play a bigger role in decision making if it valued the human capital.
The second article is by Melse Eric (2004) and is found in the Balance sheet journal. The article is entitled “What color is your balance sheet? The relevance and explanatory power of wealth accounts.” according to the author, there is an urgent need for more advanced methods and tools to analyze trends to meet the ever growing needs for regular production of financial statements that are proper. The paper tries to analyze the balance sheet through a broad viewpoint. He observes items in the balance sheet that are at high aggregation levels and tries to make a comparison with those that are at the next level of significance. This leads to a structure that is multidimensional and which is produced by all balance sheets at their time points. Thus, this approach provides an innovative way through which balance sheets can be analyzed and provide materiality that is more relevant in putting across accounting information. Therefore, instead of independent computation of financial ratios, there is application of multivariate analysis to explore a case company, that is, 3M. The company’s ten year quarterly balance sheets are studied and there is the comparison of scatter plots to find hidden data variables that can assist in explaining in a manner that is more meaningful the presence of large part variance in balance sheets. The paper further seeks to validate the general underlying assumptions that define the balance sheet structure.
The third article is by Bruce and Moss (2012) and the article’s main purpose to analyze the implications that can arise as a result of economic measures that are presented in the balance sheet and statements of income presented by a firm dealing with farming. The study involves identifying items that limit the Agricultural Resource management Survey (ARMS) from being to measure fully economic and financial situations. They found that limitations arising from this are related to issues of valuing of assets and recognizing income and expenses. Besides, data limitations when it comes computing deferred taxes, accrued items and capital leases may lead to the underestimation of leverage and reporting of year to year income variability.
The Balance Sheet
A balance sheet is one of the fundamental financial statements for any business operation. A balance sheet displays the financial state of a business usually at some point in time. Most businesses prefer to prepare their balance sheet after some consistent time interval say once or twice in a financial year. Therefore, the day to day operation of the business recorded say in the income statement is not reflected in balance sheet, however, that information is represented in a summary as either the profit or a loss of the operation. A simpler statement about a balance sheet would be likened to a snapshot of the business at that particular point in time (Burroughs, 2012).
In general therefore, while a balance sheet may sometime be referred to a financial position or condition, the use of a balance sheet is more synonymous with most business practice. This is due to the basic fact that the elements of the balance sheet need to actually balance. In actual terms, Assets as indicated in the balance sheet must be equal to the sum of liabilities and owners interest commonly referred to as equity.
Assets= Equity + Liabilities
These three components essentially make up the balance sheet. The term assets is used to refer to any property owned by the business and thus used in running the operations of the company to generate revenue. In general assets are mainly composed of current assets and a second category made up of property, plant and equipment .
Current assets are composed of cash, accounts receivable less allowance for bad debt, inventory and any other prepaid expenses. Cash is perhaps the simplest form of current assets and in most cases include cash in hand and in the bank account. Cash also include cash equivalents such as marketable securities and easily redeemable bonds. Similarly, account receivables are any credit advanced or products extended to customers who are expected to pay soon. Here a large balance may indicate poor agreement or debt collection measures for the firm. In the same regard, low account receivable balance may indicate an efficient debt collection mechanism for the business. In general, a margin of should be allowed for account receivables that caters for the possibility of failure by some customer honoring their part of the agreement. Thus, figures for account receivable must be presented in the balance less the margin for bad debt.
Inventory also makes a crucial part of the current assets. The current level of inventory during reporting in the balance sheet is sometimes difficult to ascertain (Nobes, 2011). While other firms may rely on the traditional stock take measures, others rely on the more common methods of inventory determination such as Last In First Out or First in First Out. Different industries have different acceptable levels of inventory however; there should be a reasonable proportion between account receivable and inventory.
Current assets may also be presented less current liabilities. Such current liabilities include taxes payable, current proportion of long term debt, accrued expense and accounts payable.
Finally, with regard to property, plant and equipment, commonly referred to as fixed assets, this group is composed of main installation used to run the business. They mainly include office buildings, computers, furniture and fixtures, machinery, vehicles and such like property. In general, accounting prefers that these assets be presented as the original cost of the asset less accumulated depreciated vis-à-vis expected business life (Burroughs, 2012).
In general therefore, a conventional arrangement of a balance has two sides. The right side of the balance sheet entails entries regarding liabilities of the firm and the owner’s equity. On the left side of the balance sheet are entries of assets and other forms of property that a business uses to gain revenue.
The requirement of a balance sheet is that the two sides of the table need to balance. This will then provide an indication of the state of the business.
Application of a Balance Sheet in Health Care Finance
The use of the balance sheet in any sector is extremely vital. Health care, just as other institutions have the role of reporting sound financial conditions for the sake of sustainability of business. Thus health care managers will be able to review the performance of their operations by making reference to the balance sheet. A health care balance is very similar to the conventional balance sheet. The left side of the balance sheet will have entries regarding entries of assets and other useful installations that a health care center may use to offer services. Such assets may include such as equipment in the hospital and drugs used for treatment in the medical center. Additionally, assets may also include accounts payable by insurance firms for services rendered. In the same regard, the right side of the balance sheet composed of liabilities may have several entries. Liabilities may include may include entries such as accounts payable to suppliers and long and short term debt.
Conclusion
While several financial statements may define a business, the balance sheet may be viewed as entire summary of the operation. A balance sheet allows a manager to review the current state of the business in comparison with a previous point in time.
Bruce, E and Moss, C (2012) Balance sheet and income statement issues in
ARMS: Agricultural Finance Review. Volume: 72 (2)
Burroughs, J. (2012, Feb 2). Financial Statements for Physician Leaders, Part II: The Balance Sheet. Retrieved Aug 30, 2012, from http://www.hcpro.com: http://www.hcpro.com/MSL-276020-871/Financial-Statements-for-Physician-Leaders-Part-II-The-Balance-Sheet.html
Nobes, C. (2011). IFRS Practices and the Persistence of Accounting System Classification. A Journal of Accounting, Finance and Business Studies, Vol.47, No. 3 , 267-283.
Melse, E (2004). What color is your balance sheet? The relevance and explanatory power of
wealth accounts. Balance Sheet. Vol. 12(4) 17 – 32
Washer. K and Nippan. S. (2004). Human Capital and the Balance Sheet
Financial Counseling and Planning. Volume 15 (1),
