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Last Updated on 11/30/2022 by Mark Verhoeven

Balance Sheet Definition

Balance sheet explained

A balance sheet is a financial statement that shows the assets, liabilities, and shareholder equity of a corporation at a certain point in time. Balance sheets serve as the foundation for calculating investor returns and assessing a company’s financial structure. In a nutshell, a balance sheet is a financial statement that shows what a firm owns and owes, as well as how much money shareholders have invested. To undertake basic analysis or calculate financial ratios, balance sheets can be combined with other essential financial documents.

Balance sheet process

The balance sheet is a snapshot of a company’s financial situation at a certain point in time. It cannot, on its own, provide a sense of the trends that are unfolding over a longer period of time. As a result, the balance sheet should be compared to previous quarters’ balance sheets.

A number of ratios produced from a balance sheet may be used by investors to gain a sense of a company’s financial health, including the debt-to-equity ratio and the acid-test ratio, among others. The income statement and statement of cash flows, as well as any comments or addenda in an earnings report that link back to the balance sheet, give important context for evaluating a company’s finances.

The following accounting equation applies to the balance sheet, with assets on one side and liabilities + shareholder equity on the other:

Assets=Liabilities+Shareholders’ Equity

Importance of balance sheet 

The balance sheet is a critical instrument that executives, investors, analysts, and regulators used to assess a company’s present financial health. It is frequently used in conjunction with the income statement and the cash flow statement, which are two other forms of financial statements.

The user may see the company’s assets and liabilities at a glance using balance sheets. Users may use the balance sheet to determine if a firm has a positive net worth, whether it has adequate cash and short-term assets to pay its commitments, and whether it is heavily leveraged in comparison to its rivals.

Benefits of a balance sheet

  • A balance sheet is a financial statement that shows the assets, liabilities, and shareholder equity of a corporation. 
  • One of the three fundamental financial statements used to analyze a corporation is the balance sheet. 
  • It gives a snapshot of a company’s financial position (what it owns and owes) as of the publishing date. 
  • The balance sheet follows an equation that equalizes assets, liabilities, and shareholder equity. Financial ratios are calculated using balance sheets by fundamental analysts.
 
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