A company’s balance sheet is a financial statement that shows the financial position of the company at a particular time. This sheet helps in summarizing a company’s assets, liabilities, and shareholders’ equity by showing what a company owns and owes or how much shareholders have invested.
Key Components of a Balance Sheet:
- Assets:
- Current Assets: Assets that are expected to be converted into cash or consumed within the closest year are known as current assets. Some of the common examples of these assets are; cash, account receivables, stock and short term investments.
- Non-Current Assets: Non-current assets include assets not expected to turn into cash in the next year. For instance, these assets comprise PP&E, which are property, plant & equipment, long-term investments, intangible assets such as patents and trademarks for companies or businesses alike.
- Liabilities:
- Current Liabilities: Within the coming year, the company has to settle obligations. These obligations include accounts payable, short-term loans, accrued expenses.
- Non-Current Liabilities: These are the obligations which do not fall within one year. Examples are long-term liabilities for borrowing, raw material and services received from suppliers on credit, salaries payable to the workers,pensions fund loans which are repayable in installment.
- Shareholders’ Equity:
- Common Stock: How much is the value of shares issued in the company?.
- Retained Earnings: This is the net income that the business has kept rather than paying it out to its owners as dividends.
- Additional Paid-In Capital: The extra sum of money given to investors above the nominal cost of the company’s shares.
- Treasury Stock: The amount paid by the company to acquire its own shares.
Balance Sheet Equation:
The balance sheet is based on the fundamental accounting equation:
Assets=Liabilities+Shareholders’ Equity\text{Assets} = \text{Liabilities} + \text{Shareholders’ Equity}
This equation ensures balance sheets always remained in balance so long as all assets amounting to liability aggregate correspond exactly with stockholders’ equity.
Importance of a Balance Sheet:
- Financial Health: It supports stakeholders in their assessment of the company’s financial status, strength and stability.
- Performance Evaluation: It creates a foundation for evaluation of corporate performance across time periods.
- Creditworthiness: It helps creditors and investors decide how capable a company is to pay its debts.
- Investment Decisions: Informed investment decisions are made by investors after looking at the balance sheet.
On the whole, the balance sheet is a vital tool used by managers, borrowers, investors, and other stakeholders in understanding the financial health of a firm.
Here are a couple of free Balance Sheet Templates that I have created to assist you in preparing your own Balance Sheet quickly.
