What is a Balance Sheet?

A balance sheet is a financial statement that provides a snapshot of the assets, liabilities and shareholders’ equity in a company.

The reason this form of financial statement is referred to as a balance sheet is because each side of the statement balances out the other. In other words, the assets of the company on one side are funded by the liabilities and shareholder’s equity on the other. An easy way to visualise the balance sheet equation is as follows:

Assets = Liabilities + Equity

Assets are the valuable things that the business owns or controls. Their primary purpose is to generate income and profit, either directly or indirectly. Assets may include any of the following:

• Accounts receivable
• Cash
• Inventory
• Prepaid Expenses
• Property
• Equipment
• Investment real estate
• Intangible assets

A brief list of liabilities will include:

• Accounts payable
• Corporate bonds
• Tax liabilities
• Deferred tax assets
• Unearned revenue
• Provisions as a result of legal proceedings

Equity is comprised of:

• Capital and reserves issued to equity holders of the parent company
• Non-controlling interest in equity

Essentially, a balance sheet provides a financial snapshot of a company at a specific time. In a corporation, investors and managing executives use this information to make important decisions for the direction of the organisation. Small business owners may use balance sheets to evaluate the overall financial health of the company. Balance sheets also help to identify and interpret business trends in both large and small businesses. The ability to interpret balance sheets is just one important element of your overall financial literacy. Financial literacy is crucial to managing several aspects of your personal and professional life. The more financially informed you are, the better your business and money management decisions will be. Colour Accounting™ is our financial literacy course.  Click here to secure your place. [traininglist slug=”colour-accounting-normal”]]]>