A balance sheet is a type of financial statement that summarizes a company’s health and overall worth at a single date in time. It lists all of a business’ assets, liabilities, and shareholder equity—what it owns, what it owes, and how much is left for the owner(s).
As one of the three major financial statements, along with the income statement and the cash flow statement, the balance sheet is a valuable tool for company leadership, investors, and other interested parties to understand a business’ financial condition.
A balance sheet consists of a company’s assets, liabilities, and shareholder equity. It is expressed as the following formula:
Assets = Liabilities + Shareholder Equity
It is called a balance sheet because both sides must balance out, or equal each other. A business cannot have more assets than liabilities and equity, or vice versa.
For example, if a company buys a $10,000 piece of equipment, both the assets and liabilities would increase by $10,000 because of the expense needed to purchase that asset.
Within each category, the balance sheet typically contains three types of information.
Assets include money or other valuable resources a company has to its name. Examples include:
Liabilities include money or other financial obligations a company owes to third-parties. Examples include:
Both assets and liabilities can be broken up into short-term (current) and long-term (non-current) categories.
Also known as net worth or net assets, shareholder equity is the amount of assets that belong to the owners or investors after all of the third-party liabilities are accounted for.
Balance sheets are produced by all businesses at regular intervals, such as quarterly or even monthly. Publicly traded companies will release their balance sheets to investors and financial media for transparency, and are typically required to have their balance sheets audited by an external accounting firm to ensure that they are complete and accurate.
Because balance sheets show the company’s overall financial condition at one specific point in time—the date it was produced—they are less useful than other financial statements to show trends in time. Nonetheless, comparing balance sheets over a period of time can still show a company’s progression.
Balance sheets can reveal critical information about a company’s mix of assets, debt, and equity, and can be used to pinpoint if a company has too much debt, for example, or not enough money to pay its creditors. In general, they are valuable tools for: