What Is a Balance Sheet? – Formula Used, Company, and More

balance sheet

What Is a Balance Sheet?

A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity at a specific point in time. It provides a basis for computing rates of return and evaluating its capital structure.

It is a financial statement that provides a snapshot of what a company owns and owes and the amount invested by shareholders.

The balance sheet use alongside other important financial statements such as the income statement and statement of cash flows in conducting fundamental analysis or calculating financial ratios.

Formula Used for a Balance Sheet

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

What Does a Company Balance Sheet Tell You?

The balance sheet is a snapshot representing the state of a company’s finances at the moment in time.

By itself, it cannot give a sense of the trends that are playing out over a longer period. For this reason, the balance sheet should compare with those of previous periods.

It should also compare with those of other businesses in the same industry since different industries have unique financing approaches.

Some ratios can derive from the balance sheet, helping investors get a sense of how healthy a company is. These include the debt-to-equity ratio and the acid-test ratio, along with many others.

The income statement and statement of cash flows also provide valuable context for assessing a company’s finances, making any notes or addenda in an earnings report that might refer back to the balance sheet.

1. Assets

Within the assets segment, accounts list from top to bottom in order of their liquidity – that is, the ease with which they can convert into cash.

They are divided into current assets, converted to cash in one year or less, and non-current or long-term investments, which cannot.

Here is the general order of accounts within current assets:

Long-term assets include the following:

2. Liabilities

Liabilities are the money that a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds it issues to creditors to rent, utilities and salaries.

Current liabilities are due within one year and list in order of their due date. Long-term liabilities expect at any point after one year.

Current liabilities accounts might include:

Long-term liabilities can consist of:

3. Shareholders’ Equity

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Example of a Balance Sheet

  1. The balance sheet is an invaluable piece of information for investors and analysts; however, it does have some drawbacks.
  2. Since it is just a snapshot in time, it can only use the difference between this point in time and another single point in time in the past.
  3. Because it is static, many financial ratios draw on data included in both the balance sheet and the more dynamic income statement. And the statement of cash flows paints a fuller picture of what’s going on with a company’s business.
  4. Different accounting systems and ways of dealing with depreciation. And inventories will also change the figures posted to a balance sheet.
  5. Because of this, managers have some ability to game the numbers to look more favourable.
  6. Please pay attention to the balance sheet’s footnotes to determine which systems being g used in their accounting. And look out for red flags.

Also, You can find more helpful resources at Businesssweb.

Conclusion

A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity.

The balance sheet one of the three (income statement and statement of cash flows being the other two) core financial statements used to evaluate a business.

The balance sheet is a snapshot representing the state of a company’s finances (what it owns and owes) as of publication date.

Fundamental analysts use balance sheets, in conjunction with other financial statements, to calculate financial ratios.

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