What Is a Balance Sheet?

A balance sheet shows a snapshot of a business’s financial position at a particular point in time. The statement lists the company’s assets, liabilities and owner’s equity (stockholders’ equity). The equation used to make the balance sheet balance is simple: Assets = Liabilities + Owners’ Equity.

A company’s assets are anything it owns that holds inherent, quantifiable value and could be converted to cash if necessary, such as inventory and equipment. It also includes intangibles, such as brand reputation and intellectual property. These are usually tallied as “positives” on the balance sheet. Liabilities are anything the company owes to others, from bills and interest on debt to rent and utilities. The company may also owe money to investors or have unrecognized deferred revenue.

Interested parties can use the information in a company’s balance sheet to assess its health and prospects. For example, lenders look to see whether a company’s current assets are greater than its current liabilities. The ratio derived from this comparison is called the working capital ratio, and it can be used to predict the ability of a company to cover short-term obligations.

The assets listed on a balance sheet include cash and cash equivalents, such as checking and savings accounts and marketable securities, in addition to tangible assets such as buildings, furniture and fixtures. A balanced sheet may also list non-cash assets, such as the value of stock options and other derivative instruments and intangibles. Intangibles are generally only included on a balance sheet if they can be realized as revenue or expensed as the company uses them.

For public companies that follow U.S. GAAP accounting standards, the balance sheet is usually sorted by the level of liquidity of each account, from most liquid to least. Those that follow International Financial Reporting Standards, such as those outside the United States, typically sort their balance sheets by their accounting period rather than their liquidity, with long-term liabilities coming before current ones.

The balance sheet is a vital report for any company, from a small local shop to a multibillion-dollar multinational corporation. It is an essential tool for investors, creditors and other stakeholders to understand the financial health of a company, including its ability to pay short-term debts and long-term investments. In addition, a balance sheet can help a company evaluate how efficiently it is using its assets to generate income, and the resulting rate of return for investors and owners. However, a company’s balance sheet only tells its story as of a specific date, and past performance is no guarantee of future success or failure. Therefore, a balance sheet should always be viewed in conjunction with other financial reports such as the income statement and the cash flow statement. The more information you can gather about a company, the better the decision-making process will be for all interested parties. Bilanz

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