What is a balance sheet?

Balance Sheet Definition

A balance sheet is a statement of the assets, liabilities and equity of the business or other organization as a particular point in time. Balance sheet is also known as statement of financial position.

A balance sheet can be described as a snapshot of a company’s financial condition. A balance sheet is broken up into three sections assets liabilities and capital. The difference between the assets and liabilities is the equity of the company also known as net assets, net worth or capital.

Balance Sheet Example

Following image shows a balance sheet example (classified balance sheet). Here company has assets ( cash, accounts receivable, tools and equipment) of $37800, liabilities (accounts payable) amounting to $30000 and equity (capital stock and retained earnings) of $7800, thereby showing the assets are equal to the liabilities plus equity (accounting equation).

Balance Sheet Example

Above given balance sheet example image could also be seen as a simple balance sheet template.

Now let’s discuss each of the elements of the balance sheet. Assets are anything a company owns that has value. Assets can be divided into three categories: generally listed based on how quickly they will be converted into cash. Current assets are things a company expects to convert into cash within one year such as accounts receivable, inventory and merchandise. Total amount of current assets available to a company is called Gross Working Capital. Fixed assets typically cannot be converted into cash easily such as land, computer equipment, buildings, vehicles and furniture and long-term investments. Other assets include intangibles such as goodwill, patents, or copyright and stocks or bonds that the company intends to keep for more than one year. On the other side of the balance sheet are the liabilities. Liabilities are the amounts of money that a company owes to others. Liabilities are generally listed based on their due date and can be either current or long-term. Current liabilities are obligations a company expects to pay off within the year such as accounts payable, notes payable with a collection cycle of less than a year or any payroll that is still owed to employees. Long-term liabilities are obligations that due more than one year away such as a 10 year business loan. Shareholders equity is the amount owners have invested in the company stock plus or minus the company’s earnings or losses since inception. It’s the money that would be left at the company, sold all of its assets and paid off all of its liabilities. This leftover money belongs to shareholders, the owners of the company.

Related Questions