Balance Sheet

Key takeaways
* A balance sheet is one of the three core financial statements; it shows a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
* It follows the accounting equation: Assets = Liabilities + Shareholders’ Equity.
* Analysts use balance sheets to assess liquidity, solvency, and capital structure and to calculate financial ratios.
* A single balance sheet is a snapshot—use it with other statements and historical or peer comparisons for context.

What is a balance sheet?
A balance sheet is a financial statement that reports what a company owns (assets), what it owes (liabilities), and the owners’ residual interest (shareholders’ equity) at a particular date. It helps investors, lenders, managers, and regulators evaluate financial position and capital structure.

How it works
The balance sheet is built around the accounting equation:
Assets = Liabilities + Shareholders’ Equity

Every asset must be financed either by borrowing (liabilities) or by capital from owners (equity). Because it records balances at a single point in time, the balance sheet should be compared with prior periods and other financial statements (income statement, cash flow statement) to understand trends and performance.

Components
Assets
Assets are listed in order of liquidity—how quickly they can be converted to cash.

Current assets (convertible within one year)
* Cash and cash equivalents (e.g., Treasury bills, short-term deposits)
* Marketable securities
* Accounts receivable (net of allowance for doubtful accounts)
* Inventory (valued at lower of cost or market)
* Prepaid expenses

Non-current (long-term) assets
* Long-term investments
* Property, plant & equipment (PP&E)
* Intangible assets (patents, acquired goodwill) — often recorded only when acquired

Liabilities
Liabilities are obligations to outside parties and are classified by maturity.

Current liabilities (due within one year)
* Current portion of long-term debt
* Accounts payable
* Wages and interest payable
* Customer prepayments and unearned revenue
* Dividends payable

Long-term liabilities (due after one year)
* Long-term debt and bonds payable
* Pension obligations
* Deferred tax liabilities

Note: Some obligations can be off-balance-sheet (e.g., certain leases or contingencies) and require scrutiny in notes.

Shareholders’ equity
Shareholders’ equity equals total assets minus total liabilities. Common components:
* Common stock and preferred stock (par value × shares issued)
* Additional paid-in capital (amount paid over par)
* Retained earnings (accumulated profits reinvested or not distributed)
* Treasury stock (repurchased shares reducing equity)
Par value is often a nominal amount (e.g., $0.01) and does not reflect market value.

Special considerations
* The balance must always balance; discrepancies usually indicate errors, omissions, or accounting issues.
* Companies sometimes present common-size balance sheets (percentages of total assets) to facilitate comparisons.
* Industry differences: capital structure and asset composition vary widely across industries; compare peers for meaningful analysis.
* Accounting judgments (depreciation methods, inventory valuation, allowance for receivables) materially affect reported balances. Read footnotes for details.

Why it’s important
* Risk assessment: reveals leverage, liquidity, and asset quality.
* Financing and lending: lenders and investors use balance sheets to evaluate creditworthiness.
* Decision support: managers use balance sheet data and related ratios to guide operational and capital decisions.
* Transparency: public companies disclose balance sheets to provide stakeholders with a view of financial position.

Limitations
* Snapshot in time: it shows balances on a specific date without revealing intra-period trends.
* Accounting methods and estimates can distort comparability (depreciation, inventory costing, impairment allowances).
* Some economically significant items (internally developed intangibles, certain obligations) may be understated or off-balance-sheet.
* Requires context from other financial statements and notes to be fully informative.

Who prepares the balance sheet?
* Small private businesses: owner or bookkeeper may prepare it.
* Mid-sized private firms: prepared internally and often reviewed by external accountants.
* Public companies: prepared according to accounting standards (e.g., GAAP or IFRS) and audited by independent auditors.

Example (comparative balance sheet)
A comparative balance sheet lists the company’s assets, liabilities, and equity for two or more dates side by side. This highlights trends such as changes in cash, shifts from current to non-current assets, increases in debt, or changes in retained earnings—providing more insight than a single-period snapshot.

Bottom line
The balance sheet is a foundational financial statement that summarizes what a business owns and owes at a given date. When combined with the income statement, cash flow statement, and notes, it provides essential information for evaluating liquidity, solvency, and capital structure. Use historical comparisons, peer benchmarks, and footnote disclosures to interpret the balance sheet accurately.