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What is a balance sheet?

Understanding balance sheets and how to use them.

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What is a balance sheet?

Similar to bank statements, balance sheets are a financial statement that reports a company’s assets, liabilities and owners’ equity at a particular point in time. Balance sheets help to illustrate a business’s net worth.

The balance sheet is, in essence, a financial statement that provides a snapshot into what a company owns and owes, as well as the amount that is invested by shareholders. It’s used by businesses – alongside other important financial statements such as the income statement or bank statement – to conduct fundamental analysis or calculating financial ratios.

Key points about balance sheets
    • A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity
    • Balance sheets are one of the three main financial statements that are used to evaluate a business – alongside the income statement and the statement of cash flows.
    • The balance sheet is a snapshot into a company’s finances and illustrates a business’s net worth.
    • Balance sheets can also help business stakeholders and analysts evaluate the overall financial position of a company.

Understanding balance sheets

The balance sheet represents the state of a company’s finances at a particular moment in time. It shows what a company owns and owes and exactly how much shareholders have invested.

A typical balance sheet will detail a company’s assets (cash, inventory, property etc), liabilities (rent, wages, utilities, taxes, loans etc) and shareholders’ equity (retained earnings). The formula used is as follows:

Assets = Liabilities + Shareholders’ Equity

The balance sheet is an essential tool used by a wide variety of people within a business including executives, investors, analysts and regulators in order to understand the current financial health of a business. It is mainly used alongside the income statement and cashflow statement to allow users to get a snapshot view of the assets and liabilities of a company.

Breaking down the balance sheet

As mentioned above, the balance sheet is made up of three main aspects: assets, liabilities and shareholders equity.

Assets

Assets are split into long-term and short-term assets. Short-term assets include cash and cash equivalents, marketable securities, accounts receivable, inventory, prepaid expenses etc whilst long-term assets include fixed assets, intangible assets and long-term investments. These assets are listed from top to bottom in order of their liquidity.

Liabilities

Current liabilities may include current portion of long-term debt, bank indebtedness, interest payable, wages payable, customer prepayments, dividends payable and others, earned and unearned premiums, accounts payable etc. Long-term liabilities can include deferred tax liability and long-term debt. It’s important to note that some liabilities are considered off the balance sheet so they will not appear.

Shareholders’ equity

This is the money attributable to a business’s owners or shareholders and is what remains after subtracting the liabilities from the assets. It is also known as net assets as it is equivalent to the total assets of a company minus liabilities.


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Balance Sheet FAQs

What is a balance sheet?

A balance sheet is a financial statement that details and reports a company’s assets, liabilities and shareholder equity at a particular point in time. Balance sheets represent the state of a company’s finances and is used for various business analysis and calculations.

What is the formula used on a balance sheet?

The balance sheet adheres to the following equation – where assets on one side and liabilities plus shareholders’ equity on the other, balance out.

Assets = Liabilities + Shareholder Equity

This formula is fairly intuitive – a company has to pay for all of its assets by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholder equity).


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