What Is a Balance Sheet?

The balance sheet is a key financial document that shows the assets, liabilities and shareholder’s equity of a company. It follows the accounting equation: Assets + Liabilities + Shareholder’s Equity = Net Income, and it’s used to calculate many important financial ratios and metrics, including liquidity, solvency and profitability.

A balance sheet is also useful in determining creditworthiness, securing capital and measuring the company’s performance over time. But it can have blind spots, especially if the company uses different systems or methods to calculate its depreciation, inventory and more. These variances can lead to some “game-playing” of the numbers, so it’s important to compare multiple years’ balance sheets when analyzing a company.

The main items on a balance sheet are the company’s assets, which are the value of all the things the company owns and has a claim to. These can include anything from cash and accounts receivable to property, tools, vehicles, furniture and more. The assets are typically broken down into current and non-current assets, with the current portion showing more liquid elements first, such as cash and marketable securities. The balance sheet also includes intangible assets, such as intellectual property and goodwill. These can be difficult to put a dollar amount on, but they are usually included in the report because of their significant value to the company.

A company’s liabilities are the money it owes to other entities, from bills and debt repayments to interest payments and payroll taxes. The liabilities are divided into the current and long-term categories. The current liabilities are those due within one year, while the long-term liabilities are payable more than a year in the future.

Finally, the balance sheet reports the company’s shareholders’ equity, which is what it has earned through its operations. This is the money that investors have paid for a company in return for ownership shares, and it can also be impacted by dividend payments, which are the return of the company’s net income to shareholders.

The most important part of a balance sheet is that it shows whether a company has enough money to pay its liabilities, which is what it’s responsible for. It’s also a great way to see how much the company has leveraged its assets and how profitable it is. The most common uses for the balance sheet are to prepare for a merger, analyze a potential investment or acquisition and as proof of creditworthiness when applying for loans.Steuerberatung Hattingen