A balance sheet is a snapshot of a company’s assets, liabilities and ownership equity at one moment in time. It adheres to the equation Assets = Liabilities + Ownership Equity, and is used by financial analysts to calculate a variety of ratios. It also helps managers and owners get a quick view of their company’s health, including whether it has enough cash or short-term assets to pay its debts. Often used in conjunction with the more dynamic income statement and cash flow statements, the balance sheet is a powerful tool for businesses of all sizes.
A balanced sheet will differ slightly between companies, but there are several buckets and line items that will be found on every one. The most important components are Current Assets, Long-term Assets, Liabilities and Equity.
The current assets section of a balance sheet includes all of the money that a company owns and can easily convert into cash within a year, such as cash or cash equivalents and marketable securities. The section may also include inventory, accounts receivable and prepaid expenses. Intangible assets may be included, although these are usually only listed if they are of high value and/or widely recognized, such as trademarks or patents.
Any liabilities that a company must repay to outside parties appear in the liabilities section of the balance sheet. These may include a wide range of obligations, from interest on bonds issued to creditors to rent, utilities and salaries. The liabilities section of the balance sheet may also include deferred tax liabilities, which represent temporary timing differences between a company’s income for tax purposes and its earnings reported for financial statement purposes.
Finally, the owners’ equity section of a balance sheet contains the contributions made by shareholders to a business and can be broken down into several categories, depending on the structure of the company. In a privately held company, this may simply be the amount invested by the owners themselves, and in a public company, it would include common stock and other equity shares. This section may also include a company’s retained earnings and accumulated other comprehensive income.
While a balance sheet is a key report for any company, it does have some limitations. For example, a company’s current assets and current liabilities may not always match up, as the former represents future spending commitments, while the latter represents the sum of all outstanding debt. Additionally, the static nature of a balance sheet can make it less helpful than a more dynamic income statement or a cash flow statement when it comes to making decisions about the direction of a company. For these reasons, many financial analysts rely on both the balance sheet and the more dynamic income statement when analyzing a company. Bilanz Hattingen