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Balance Sheet Limitations

Updated on July 2, 2012

The balance sheet is one of three frequently created business financial statements. It lists a company's assets, liabilities, and equity dollar amount, the result showing the net worth of an organization. Though frequent and essential in the business environment, there are very specific balance sheet limitations. Stakeholders should really recognize these constraints in order to comprehend just how the economic impact of each balance sheet limitation affects the statement’s reporting capability.

Assets recorded on an organization’s balance sheet – particularly long-term asset groups – reveal only the item’s historical costs. This simply represents just what a company paid for the item in some previous time period, which is often undisclosed. Historical expenses are frequently much different than current market prices, which is exactly what the organization would definitely pay today or the same item. Specific organizations may have copious asset resources that increase asset accounts, making historical cost an important balance sheet limitation to recognize.

Another balance sheet limitation comes when the financial statement does not indicate an organization’s real economic or market value. No solitary figure exists that gives the company’s economic value on the balance sheet. The financial data summarized here only aims for various dollar values on certain parts of the company. For example, the economic value that occurs when adding an additional person or asset – or the sale or removal of an item – would not in fact be given proper valuation on the balance sheet.

Balance sheets do not typically report the value of a company's control group or executive team, which can be among the biggest balance sheet limitations. The value of trained personnel or specific individuals can enhance a company's worth significantly. No reporting, however, lists this detail for assessment by stakeholders. Furthermore, no specific measurement accurately sets a worth on the replacement value of an organization’s management group. For instance, what one stakeholder or individual finds financially irreplaceable, another person may not.

Accounting typically makes substantial use of estimates for stating balance piece dollar amounts. Stock, depreciation, and accounts receivable are just a couple accounting items that commonly require on estimate. Generally accepted accounting principles allow for realistic and accurate estimates that depict an organization’s economic transactions. Realistic estimations, however, may rely on each accountant’s experience and opinion instead of the outside guidance, with the result being an increase in balance sheet limitations for the estimated items on the financial statement.

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