What Is a Balance Sheet?

The balance sheet is one of the three core financial statements (along with the income statement and cash flow statement). It provides a snapshot of a company’s assets, liabilities and ownership equity at a particular point in time. It’s based on the fundamental equation: Assets = Liabilities + Equity. While the contents of a balance sheet will vary slightly between companies and industries, there are several “buckets” and line items that are nearly universal.

The first bucket of a balance sheet is current assets. This includes cash and cash equivalents, marketable securities and accounts receivable. The total of these will usually be listed towards the top of the report, with more detailed breakdowns of each component underneath.

A business’s long-term assets might include inventory, plant and equipment and intangible assets such as patents or trademarks. These are typically reported at historical cost on the balance sheet, although some intangible assets may be valued at market value instead. A business’s liabilities will often be comprised of short-term debts like bank loans and overdue account payables, as well as long-term debt such as corporate bonds, mortgage payments and pension obligations. It will also likely have an accrued expense line item to record interest on outstanding loans and income tax liabilities.

Investors and analysts will look at a company’s balance sheet to see how much it is worth, as well as to find out whether it has enough money to pay its bills and make investments. They’ll compare a company’s balance sheet from one reporting period to the next to see how it is growing or shrinking over time.

While there are some limitations to a balance sheet (it’s static), it is an important document that provides valuable insight into a company’s financial health. It’s also the basis for other more dynamic financial statements, such as the income statement and the cash flow statement.

A company’s balance sheet can help it craft internal decisions, such as determining how much debt it should take on and if its current cash reserves are sufficient. It can also help a business evaluate its competition by calculating key ratios such as the debt-to-equity ratio.

A company’s balance sheet can help it decide if it has the capacity to take on new debt, or to invest in growth opportunities such as expanding into a foreign market. It can also be used to calculate the ratios that show how a business is doing compared to its peers, such as the profit margin and the current ratio. If a business is struggling, its balance sheet can help it pinpoint what changes need to be made to turn things around. For example, if a company’s expenses for wood go up but its sales don’t, its balance sheet will indicate that it needs to cut costs. The resulting savings can then be applied to reduce debt, increase current assets or invest in growth opportunities. A balance sheet can also be used to identify errors in reporting. Bilanz Hattingen

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