A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It outlines the company’s assets, liabilities, and shareholders’ equity, offering a clear view of what the company owns and owes, as well as the amount invested by shareholders.
The balance sheet is typically divided into three main sections:
Assets: This section lists all the resources owned by the company that have economic value. Assets are generally classified into:
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- Current Assets: Assets that are expected to be converted into cash or used up within a year, such as cash, accounts receivable, and inventory.
- Non-Current Assets (or Long-Term Assets): Assets that are expected to provide economic benefits beyond one year, including property, plant, equipment, and intangible assets like patents or trademarks.
Liabilities: This section details the company’s obligations or debts. Liabilities are also divided into:
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- Current Liabilities: Debts or obligations due within a year, such as accounts payable, short-term loans, and accrued expenses.
- Non-Current Liabilities (or Long-Term Liabilities): Debts or obligations due after one year, including long-term loans, bonds payable, and pension liabilities.
Shareholders’ Equity: This section represents the owners’ claim on the company’s assets after all liabilities have been paid off. It includes:
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- Common Stock: The value of shares issued to investors.
- Retained Earnings: The accumulated profits that have been reinvested in the business rather than paid out as dividends.
- Other Equity Items: This can include items like treasury stock and other comprehensive income.
The fundamental equation that underlies the balance sheet is:
Assets = Liabilities + Shareholders’ Equity
This equation ensures that the balance sheet is always balanced, meaning the total value of the company’s assets is always equal to the sum of its liabilities and shareholders’ equity. The balance sheet is a key tool for investors, creditors, and management to assess the financial health and stability of a business.