What Is a Balance Sheet?

A balance sheet is a financial statement that includes a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It is considered one of the main financial statements for a business.

While a balance sheet does not provide all the financial information needed to fully analyze a business, it can provide useful insight into the current health of a small business’s finances.

Continue reading our What Is a Balance Sheet? guide for a more detailed description, an explanation of how a balance sheet works, and an example of a balance sheet.

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Balance Sheet Definition

A balance sheet is a financial statement that includes a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It is considered one of the main financial statements for a business. The four main financial statements are:

Assets are listed on the left side of a balance sheet, and liabilities and shareholders’ equity are listed on the right side. If you are keeping track of your company’s balance sheet yourself, we recommend using specialized accounting software. Check out our guide to the Best Accounting Software for Small Businesses to find the best option for you.

Balance Sheet Formula

The standard equation for a balance sheet is that assets = liabilities + shareholder equity. So, as the name suggests, the left side of the balance sheet (assets) is equal to or balanced with, the right side (liabilities and shareholder equity).

What Items Are on a Balance Sheet?

There are three main items on a balance sheet: assets, liabilities, and shareholders’ equity. Each of these sections is then broken down into more detailed items, which can vary slightly depending on the company – not all companies have the same types of liabilities, assets, and shareholders equity.

Assets

Assets are what a business owns. On a balance sheet, assets are listed on the left side. The two main categories of assets are current assets and noncurrent assets.

Current assets can include the following:

  • Cash and cash equivalents - Cash, short-term CDs, other liquid currency
  • Accounts receivable - Money that customers owe for products or services already sold
  • Inventory - Goods or products that are ready for sale
  • Prepaid expenses - Rent, insurance, etc. that has already been paid for
  • Marketable securities - Short-term equity or debt securities that can be easily sold

Noncurrent assets can include:

  • Fixed assets
    • Land
    • Buildings
    • Equipment
  • Intangible assets
    • Patents
    • Copyrights
    • Trademarks

Liabilities

Liabilities are what a company owes. Liabilities are listed on the right side of a balance sheet. The two main categories of liabilities are current and long-term. Long-term liabilities include things like bond payments and deferred tax liability.

The vast majority of liabilities for a small business are short-term liabilities, which can include:

  • Accounts payable - Money owed for products or services a business has bought
  • Credit lines and loans - Money that a company has borrowed
  • Salaries payable - Salaries owed but not yet paid

Shareholders Equity

Shareholders equity (or owners equity) is the amount of money that would be left over and distributed to shareholders or owners if all of a company’s assets were sold and its liabilities were paid. Shareholders’ equity is located on the right side of the balance sheet along with liabilities.

Shareholders’ equity can include:

  • Common stock - Stock that represents an ownership stake in a company
  • Retained earnings - The portion of a company’s profits that have been saved
  • Preferred stock - A type of stock where holders generally don’t have voting rights, but they have a higher claim over dividend and asset distributions than common stockholders
  • Additional paid-in capital - The difference between the par value of stock and what investors actually paid for it
  • Treasury stock - Previously issued shares of stock in a company that the company bought back

What Is a Balance Sheet Used For?

A balance sheet is used to help inform owners, investors, analysts, lenders, and others about the current financial health of a company.

You can use the information on a balance sheet to calculate certain financial ratios that can be helpful in analyzing a company, including:

  • Current ratio = current assets/current liabilities
  • Quick ratio = (current assets - inventories)/current liabilities
  • Debt/equity ratio = total liabilities/shareholders equity

The balance sheet is only one of the main financial statements for a business, and it doesn’t provide a complete picture of a company’s financial health, but it does provide some useful information.

Balance Sheet Frequently Asked Questions

What is a balance sheet used for?

A balance sheet is used to help inform owners, investors, analysts, lenders, and others about the current financial health of a company.

What items are on a balance sheet?

The three main parts of a balance sheet are assets, liabilities, and shareholders’ equity. Each of these sections can be broken down into more detailed parts.

Why is it called a balance sheet?

It is called a balance sheet because the left side (the assets section) should be equal to the right side (the liabilities and shareholders equity sections). In other words, the two sides are balanced.

What are the four types of financial statements?

The four main financial statements are the income statement, balance sheet, statement of cash flow, and statement of retained earnings.

Is accounts receivable an asset?

Yes, accounts receivable is listed as an asset on a balance sheet.

What is a healthy balance sheet?

What makes a balance sheet healthy or strong is a bit subjective and can depend on the type of company, as well as many other factors, but generally speaking, a healthy balance sheet will at least have positive net assets.

What is the difference between accounts payable and accounts receivable?

Accounts payable is money a company owes, while accounts receivable is money owed to the company.

Does a balance sheet have to balance?

Yes, the left side of the balance sheet should equal the right side.

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