Month End Glossary

Off-Balance Sheet

Off-Balance Sheet refers to items or activities that a company engages in which are not reflected on the company's balance sheet.

Off-Balance Sheet items are financial transactions, obligations, or instruments that are not recorded directly on the balance sheet but may still pose a financial risk or benefit to the company. For example, operating leases under certain accounting standards may be considered off-balance sheet items before recent changes to reporting practices. Such items are disclosed usually in the financial statement's notes. Companies sometimes use off-balance sheet financing to improve financial ratios or to keep certain assets or liabilities off the main financial statements. Although not immediately visible in balance sheet metrics, off-balance sheet items are important for a comprehensive investigation into a company's financial health. For instance, a company might have an agreement to purchase a product inventory from a supplier but the agreement stipulates future purchases which are not immediately recorded as liabilities in the balance sheet. This form of off-balance sheet arrangement could mean different implications when evaluating the enterprise's commitments and financial leverage. Having a checklist and documentation process with tools like Easy Month End can greatly facilitate accurately recognizing and disclosing possible off-balance sheet engagements.

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