What Is a Balance Sheet?

A balance sheet is a snapshot of the financial condition of a company at any given point in time. It lists a company’s assets (movable items) and liabilities (movable or non-movable items) on one side, and its ownership equity on the other. Like all financial statements, balance sheets are prepared periodically — usually quarterly, monthly or annually — to reflect the company’s standing as of that date. The format and structure of a balance sheet can differ slightly between organizations and industries, but there are several basic accounts that are usually included.

Assets are the things a business owns that are helpful for its operation. These include cash and cash equivalents, marketable securities, inventory and fixed assets such as buildings, machinery and trademarks. The main categories of assets are based on their convertibility and physical existence: current assets are those that can be turned into cash within a year, including short-term deposits, accounts receivable and inventory. Non-current assets are those that have a lifespan of more than a year, such as the principal and interest on mortgages and corporate bonds. Liabilities, meanwhile, are what a company owes to other parties. These are listed on the right side of the balance sheet and can be divided into two categories based on their liquidity: current liabilities are those that will need to be paid in less than a year, such as accounts payable and wages payable; long-term debts are those with payment terms that extend past a year, such as loan payments and pension payments.

In order to balance the sheet, the total of a company’s assets must equal its total liabilities plus shareholders’ equity. This is a simple equation to understand, and it can be used to gauge how financially healthy a company is.

For investors and lenders, a balance sheet is a key indicator of a company’s strength. It helps investors determine how much risk they’re taking by comparing its assets to its debts, while lenders can see whether the company is capable of meeting its short-term obligations. Depending on the type of business, a balance sheet may also be useful when applying for financing, as it can help demonstrate that a business is liquid and has enough assets to cover its debts.

A balance sheet is a vital tool for any business, and it’s important to know how to read one so that you can analyze the numbers and make informed decisions about your company’s finances. If you’re unsure where to start, meet with a local business banker to learn more about your financing options and how to prepare a balance sheet for your own small business. Bilanz Hattingen

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