Limitations of a Balance Sheet

Snapshot

Historical Costs

Estimations

Excluding Data

Balance sheets show a snapshot of a company at a certain point in time, but they do not show the details that led the company to that point. A balance sheet does not present revenues and expenses that make up the net profit or loss numbers.

Depending on the company and software used, a balance sheet may show one number that includes net income and loss without showing separate net income and loss figures. It does not show the details of whether a company is in a profit or loss situation, which many managers, investors, and business owners want to know.

Balance sheets do not show the true value of assets because they reflect original cost and do not calculate depreciation.

For example, a company purchases an asset at a particular value, but the asset may increase or decrease in value over time. The balance sheet records only the initial cost or value.

Balance sheets display some current assets on an estimated basis, which does not reflect companies' true financial position.

For example, a jewelry company sells small beads as part of its inventory. Because the employees cannot count every small bead, the company estimates the number of small beads in its inventory.

Balance sheets do not reflect assets that do not have a monetary term but provide great value to the company.

For example, a company may employ an award-winning expert who gives the company a competitive edge.