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Balance Sheet
A financial snapshot showing what a company owns (assets), owes (liabilities), and the residual value to shareholders (equity).
Formula
Assets = Liabilities + Shareholders' Equity
This equation must always balance.
Working Capital = Current Assets - Current Liabilities
Definition
What is a Balance Sheet?
A balance sheet shows what your company owns (assets), what it owes (liabilities), and the residual value belonging to shareholders (equity) at a specific point in time. Unlike the income statement which covers a period, the balance sheet is a snapshot.
The fundamental equation: Assets = Liabilities + Equity. This always balances, hence the name.
Key Balance Sheet Components
Assets: Cash, accounts receivable, inventory, equipment, intellectual property. Liabilities: Accounts payable, loans, deferred revenue, accrued expenses. Equity: Common stock, preferred stock, retained earnings, additional paid-in capital.
Why the Balance Sheet Matters
The balance sheet reveals financial health and stability. Strong assets relative to liabilities indicate solvency. Growing equity shows value creation. Deferred revenue on the balance sheet represents future revenue already collected.
Example
Simplified balance sheet:
- Assets: $500,000 (cash, receivables, equipment)
- Liabilities: $200,000 (payables, loans, deferred revenue)
- Equity: $300,000 (investment + retained earnings)
Assets = Liabilities + Equity
$500K = $200K + $300K ✓
The balance sheet always balances.
Related Terms
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