Balance Sheet

What is Balance Sheet?

A balance sheet is a financial statement that consists of a list of the company's assets, liabilities, and shareholders' equity at a specific time period. Most analysts use the balance sheet to calculate the financial ratios of a company.

In simple words, a balance sheet describes what a company owns, owes, and the amount invested by the shareholders. It basically is a snapshot of a company's finances and contains all the financial statements. Balance sheets provide the basis for calculating the investment returns and the company's capital structure.

How Balance Sheet Work?

A balance sheet is a fundamental analysis of a company's financial conditions at a moment in time. Investors use balance sheets to understand the financial condition of a company by deriving the ratios from it, like the debt-to-equity ratio and acid-test ratio. There is a balance sheet formula to know the assets of a company, which states that the assets are equal to the liabilities plus the equity of shareholders.

Assets = Liabilities + Shareholders' Equity

The statement of cash flows and the income statement also provide valuable insights to understand the company's financial picture, but they might also refer back to the information on the balance sheets.

Components of Balance Sheet

There are three main components of a balance sheet, which are given below:

1. Assets

The company's assets consist of the items that are of value and can be converted into cash. The items are listed on the basis of how easily they can be converted into cash, that is order of liquidity. The assets are further divided into two types:

• Current Assets
• Long-term Assets

2. Liabilities

This section in the balance sheet format represents the money that the company owes to others, like recurring expenses, loans, and other forms of debt. Liabilities are also of two types:

• Current Liabilities
• Non-current Liabilities

3. Shareholders' Equity

It consists of the information bout the money that the stockholders have invested in the company. It also has two types:

• Retained Earnings
• Share Capital