The balance sheet is one of the three fundamental financial statements and is key to both financial modeling and accounting. The balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. It can also be referred to as a statement of net worth, or a statement of financial position.
The balance sheet is based on the fundamental equation:
Assets = Liabilities + Equity.
A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity at a specific point in time, and 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, as well as the amount invested by shareholders.
It is used alongside other important financial statements such as the income statement and statement of cash flows in conducting fundamental analysis or calculating financial ratios.
Balance sheets provide a snapshot of a company’s finances at a specific point in time. By itself, it cannot provide a sense of the trends over a longer period. For this reason, the balance sheet should be compared with those of previous periods. Investors can get a sense of a company’s financial wellbeing by using a number of ratios that can be derived from a balance sheet, including the debt-to-equity ratio and the acid-test ratio, along with many others. Similarly, the income statement and statement of cash flows serve to provide context for assessing a company’s finances, as do any notes or addenda in an earnings report that refer back to the balance sheet.
There are many variables in a balance sheet, but they all boil down to tallying or equalizing two sides of the data.
Assets represent everything an organization owns. Assets can either be current – to be converted to cash immediately – or noncurrent – like fixed assets like an office, equipment, property, bonds, and stocks.
Liabilities include both current and noncurrent obligations. The former is the payments your company must make in a year. In the latter case, payments must be made over a longer period of time. Liability should be added to equity in balance with assets. Ownership equity or shareholder equity can be equity. They can also be assets.
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