A balance sheet is a snapshot of a company’s finances (what it owns and owes) as of a point in time. It adheres to an equation that equates assets with liabilities and shareholder equity, which fundamental analysts use to calculate financial ratios. It is one of three core financial statements used by companies, along with the income statement and cash flow statement.
Typically, a company’s assets are listed on the left side of its balance sheet with liabilities and shareholders’ equity on the right side. The assets are broken down into current and noncurrent assets. Depending on the company, this may include cash, inventory, investments and property, plant and equipment. Liabilities are usually broken down into short-term debts and long-term debts. The total of all liabilities and shareholders’ equity is then shown at the bottom of the balance sheet.
In addition to listing a company’s assets and liabilities, the balance sheet also includes a column called “working capital.” Working capital is calculated by subtracting a business’s total liabilities from its total assets. It provides a snapshot of a company’s ability to pay its debts in the near future. This information can be helpful for investors, creditors and potential lenders.
A company’s balance sheet is generally prepared by a certified public accountant (CPA) or by its internal accounting department. However, if a company is very large, it may be prepared by an independent CPA firm. Small or mid-size private companies, on the other hand, might prepare their own balance sheets with only a few staff members.
The format of a balance sheet can vary by company, as the report must conform to the financial reporting standards of the country in which the company is based. For example, a company headquartered in the United States must adhere to Generally Accepted Accounting Principles (GAAP), while a company headquartered in Europe or Asia may follow International Financial Reporting Standards (IFRS).
Regardless of format, a balance sheet should be presented in a way that is easily readable by an outsider. The data should be organized with the most liquid assets at the top of the list and the least liquid assets at the bottom. Ideally, a balance sheet should also be presented with the company’s net worth in the form of total assets minus total liabilities. This information is vital to understand a company’s overall health and whether it has the resources to meet its near-term obligations, meet debt repayments in the future and make distributions to shareholders. It also enables users to assess the company’s ability to make long-term investments. Other critical details that are gathered from a balance sheet include its liquidity and solvency ratios. Bilanz Hattingen
