A company’s balance sheet is a snapshot of its financial condition at one point in time. It includes all the company’s assets and liabilities. Unlike the income statement, which shows how much a company earned or lost over a period of time, the balance sheet depicts how much a company is worth and how much debt it has as of a given date. The balance sheet also helps calculate a variety of financial ratios that give an indication of how liquid or solvent the company is, how efficiently it’s using its resources and how much risk it is taking on with its assets.
The basic structure of a balance sheet is consistent across organizations. There may be minor variations in how accounts are categorized and presented, but the most important parts of a balance sheet are always present: Assets = Liabilities + Owner’s Equity.
Assets include items that a company owns, such as equipment and inventory. They could also include a business’s cash, accounts receivable and marketable securities. In most cases, assets are classified into current and non-current categories. The current liabilities section typically reports the balances of each account owed by the company, while the long-term liabilities section usually contains only the principle and interest payments on loans and bonds. Both sections are then reconciled to the total overall liabilities and shareholders’ equity on the right-hand side of the report.
In order to determine the true value of a company, a balance sheet must be viewed in conjunction with other financial statements, such as the income statement and cash flow statement. This is because a balance sheet is based on historical data and therefore doesn’t provide an insight into the future performance of a company. However, a balance sheet is still an important tool in the financial reporting process because it helps to highlight discrepancies that might be overlooked without it.
Whether it’s used by investors to make investment decisions or by companies to prove its creditworthiness when applying for loans, the balance sheet is an essential document in the financial world. It provides a picture of the company’s value and health at that moment in time, so it can help investors decide how to invest their money and lenders understand what sort of credit risk the company is taking.
The FreshBooks Support team does not offer tax or accounting advice, and the information contained in this article should not be considered as such. For questions on these topics, please reach out to your local accountant or CPA. Bilanz