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A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity, at a specific point in time.  It provides a basis for computing rates of return and evaluating capital. A balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.

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The balance sheet is usually used with other important financial statements such as: Income Statement and Statement of Cash Flow, which helps in analysis or calculating financial ratios.

 

The balance sheet consists of the following accounting equation, where assets on one side, and liabilities plus shareholders' equity on the other, balance out:
 

Assets = Liabilities + Shareholders’ Equity
 

For example: a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholders' equity).  All revenue the company generates in excess of its expenses will go into the shareholders' equity account. This revenue will be balanced on the assets side, appearing as cash, investments, inventory, or some other asset.

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A balance sheet by itself cannot give a sense of the financial condition of the business or trends that are playing out over a long period.  For this reason, the balance sheet should be compared with balance sheets from previous periods. 

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A number of ratios can be derived from the balance sheet to help investors get a sense of how sustainable the company is.  You can use a basic program like Microsoft Excel to create a Balance Sheet and include the following information in the example below (Source: Freshbooks.com):

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To learn more about balance sheets for business, watch this YouTube video:

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By Jason Torrents

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