A balance sheet also known as statement of financial position is a financial statement that provides a company’s financial health for a specific period. It presents a company’s assets, liabilities, and shareholders’ equity.
Assets = Liabilities + Shareholders’ Equity
Content Outline
Key Takeaways for Balance Sheet
A balance sheet is a snapshot of a company’s financial position at a certain period in time.
It adheres to the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity.
Understanding a balance sheet is crucial for investors, creditors, and management to assess a company’s financial strength.
Balance sheets are prepared at the end of an accounting period (Eg, a quarter or at the end of a financial year.)
The figures presented on the balance sheet are generally based on the historical cost which may not reflect current market values.
To gain a complete financial picture, balance sheets should be analyzed in conjunction with the income statement and cash flow statement.
The balance sheet should be read together with the income statement and statement of cash flows to get a comprehensive view of the company’s financial health.
How Does A Balance Sheet Work?
A balance sheet is organized into three primary sections:
- Assets: Resources owned by the company expected to provide future benefits. Examples include cash, inventory, property, and equipment.
- Liabilities: Obligations the company owes to others. Examples include loans, accounts payable, and taxes owed.
- Shareholders’ Equity: The owners’ interest in the company, including funds from shareholders and retained earnings.
The balance sheet always balances which means total assets must be equal to total liabilities and shareholders’ equity.
Why Is A Balance Sheet Important?
- Financial Health Assessment: It gives information on the company’s solvency, liquidity and financial structure.
- Investment Decisions: Investors use balance sheets to determine the company’s total assets, its debts, and overall financial stability.
- Creditworthiness: Creditors assess a company’s ability to repay debts by analyzing its balance sheet.
- Performance Evaluation: By comparing balance sheets over time, you can track changes in a company’s financial position.
Balance Sheet Example
ABC Corporation Balance Sheet as of December 31, 2023
Assets
- Current Assets:
- Cash: $25,000
- Accounts Receivable: $15,000
- Inventory: $10,000
- Non-Current Assets:
- Property, Plant & Equipment: $50,000
Total Assets: $100,000
Liabilities
- Current Liabilities:
- Accounts Payable: $8,000
- Short-Term Debt: $2,000
- Non-Current Liabilities:
- Long-Term Debt: $20,000
Total Liabilities: $30,000
Shareholders’ Equity:
- Common Stock: $50,000
- Retained Earnings: $20,000
Total Shareholders’ Equity: $70,000
Total Liabilities and Shareholders’ Equity: $100,000
In this example, the balance sheet of ABC Corporation presents an equation where the total values of assets balance with the total values of liabilities plus the shareholders’ equity, capturing the company’s position at the end of the year.