If you’re not quite sure how a balance sheet works and what it’s purpose is, listen to this brief clip about the Beginner’s Guide to Financial Statements: The Balance Sheet.
A balance sheet is also known as a statement of financial position. It’s a snapshot of a company’s financial condition at a specific moment in time. It shows the value of what the business owns, the amount of debt the business has, how much inventory is on hand, and how much money the business has to work with in the short-term.
The balance sheet helps a business owner or potential lender quickly understand the financial strength and capabilities of the business. It’s based on this equation: Assets = Liabilities + Shareholders’ Equity. The sum of both sides of the equation must balance.
Assets – anything a company owns that has value (including current assets, fixed assets, and long-term assets)
Liabilities – the amount of money that a company owes to others (including current or long-term liabilities)
Shareholders’ Equity – also known as capital or net worth; the amount owners have invested in the company’s stock, plus or minus the company’s earnings or losses since inception