What is Balance Sheet?

A balance sheet is one of the three primary financial statements used to assess a company’s financial health and its financial position at a specific point in time. The other two financial statements are the Income Statement (or Profit and Loss Statement) and the Statement of Cash Flows. The balance sheet provides a snapshot of a company’s assets, liabilities, and shareholders’ equity as of a particular date, typically at the end of a quarter or fiscal year.

Here are the key components of a balance sheet:

Assets: Assets are what a company owns or controls. They are divided into two categories:

Current Assets: These are assets that are expected to be converted into cash or used up within one year or one operating cycle, whichever is longer. Common examples include cash, accounts receivable (money owed by customers), inventory, and short-term investments.

Non-Current Assets (or Long-Term Assets): These are assets that are not expected to be converted into cash or used up within the next year. Examples include property, plant, equipment, long-term investments, and intangible assets like patents and trademarks.

Liabilities: Liabilities represent the company’s obligations or debts. Like assets, liabilities are divided into two categories:

Current Liabilities: These are obligations that are expected to be settled within one year or one operating cycle, whichever is longer. Common examples include accounts payable (money owed to suppliers), short-term loans, and accrued expenses.

Non-Current Liabilities (or Long-Term Liabilities): These are obligations that are not expected to be settled within the next year. Examples include long-term loans, bonds payable, and deferred tax liabilities.

Shareholders’ Equity: Shareholders’ equity represents the residual interest in the assets of the company after deducting liabilities. It’s essentially the net assets of the company that belong to the shareholders. Shareholders’ equity includes:

Common Stock: The value of shares issued to shareholders.

Retained Earnings: The cumulative net earnings (profits) the company has earned over time, minus dividends paid to shareholders.

The balance sheet follows the accounting equation, which states that:

Assets=Liabilities+Shareholders
—–
Equity

In other words, the total value of a company’s assets must equal the total value of its liabilities and shareholders’ equity. This equation reflects the fundamental principle of double-entry accounting, which ensures that every financial transaction has an equal impact on both sides of the equation.

The balance sheet is a valuable tool for investors, creditors, and company management. It provides insights into a company’s financial stability, liquidity, and leverage. For example, it can help determine if a company has enough assets to cover its debts (solvent), whether it can meet its short-term obligations (liquid), and how much of the company is financed by equity versus debt.