What is balance sheet?
A balance sheet is a financial statement that provides a snapshot of a company’s financial condition at a specific point in time. It is one of the three primary financial statements used for financial reporting, alongside the income statement and the statement of cash flows. The balance sheet is also known as the statement of financial position.
The balance sheet is divided into two main sections:
- Assets: This section lists all of the company’s resources and what it owns. Assets are typically categorized into two subgroups:
- Current Assets: These are assets that are expected to be converted into cash or used up within one year or one operating cycle (whichever is longer). Common current assets include cash, accounts receivable, inventory, and short-term investments.
- Non-current Assets (or Long-term Assets): These are assets that are not expected to be converted into cash or used up within one year. Non-current assets include property, plant, equipment, investments in other companies, and intangible assets like patents and trademarks.
- Liabilities and Equity: This section represents the company’s sources of funds, which include what it owes (liabilities) and what is left for the owners (equity). It is also divided into two subgroups:
- Current Liabilities: These are obligations that are expected to be settled within one year or one operating cycle. Common current liabilities include accounts payable, short-term debt, and accrued expenses.
- Non-current Liabilities (or Long-term Liabilities): These are obligations that are not due within one year. Non-current liabilities include long-term debt and deferred tax liabilities.
- Equity: This represents the residual interest in the assets of the company after deducting its liabilities. It includes common stock, retained earnings, and other equity accounts.
The balance sheet equation, which must always hold true, is:
Assets = Liabilities + Equity
In other words, a company’s assets must equal the sum of its liabilities and equity. This equation reflects the fundamental accounting principle of double-entry accounting, ensuring that a company’s financial records are balanced.
The balance sheet provides important information about a company’s financial health, liquidity, and its ability to meet its short-term and long-term obligations. It is a key tool for investors, creditors, and analysts to assess a company’s financial position and make informed decisions.