What Is A Balance Sheet?
A balance sheet is the financial statement of a company or an organization, and it reports the entity’s assets, liabilities, and shareholders’ equity.
The term “balance sheet” refers to a financial statement that essentially reports what a company owns, owes, and the amount invested by shareholders. The purpose is to give investors and analysts an idea about the financial status of a company. It helps investors decide whether a company is worth investing in or not.
Generally, the balance sheet gives an overview of a company’s finances at the moment in time. Companies prepare it at the end of a reporting period, such as a month, quarter, or year. It is helpful in the sense that:
- It breaks down the three major business components, i.e., assets, liabilities, and shareholders equity. That allows investors and analysts to understand the current financial state of the company in review.
- It helps companies secure loans from banks and other financial institutions. Usually, the lending institution will check the company’s balance sheet before granting the loan to see whether they are financially stable.
There are three things that a company records on a balance sheet:
- Assets: These are things the business owns that they can sell to raise money, such as patents, machinery, buildings, and lands. It also includes the money they have in the bank, money owed to them by customers, and investments such as stocks and bonds.
- Liabilities: These are things that the business owes to other entities. They include items bought on credit, wages owed to employees, loans from financial institutions, and unpaid taxes.
- Equity: This is what belongs to the owners or shareholders of the business. It includes the capital used in starting the business, revenue minus all expenses, and stocks.
Balance Sheet Example
Jennifer owns a hairdressing salon. Beatrice wants to invest in the business, so at the end of the quarter, she asks Jennifer to prepare a balance sheet to get an overview of the financial state of her saloon. Jennifer reports her assets which include $3,000 saved in the bank and equipment worth $7,000. Her liabilities are $400 tax owed and $1,500 unpaid loan. Her equity is the $5,000 she used in starting the business.« Back to Glossary Index