What is a Balance Sheet?
A Balance Sheet is one of the three core financial statements. It provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders at a specific point in time.
It shows the company's assets, liabilities and shareholders' equity at a particular date and is used to determine the financial strength and capabilities of the business. By comparing current balance sheets to previous balance sheets and other financial reports, finance teams can evaluate changes to the company’s finances over time.
Format of a Balance Sheet
The Balance Sheet is typically organized in one of two formats: the account format, with assets on the left and liabilities and equity on the right, or the report format, with assets followed by liabilities and equity below. It’s laid out with the following equation:
Assets = Liabilities + Shareholders' Equity.
Assets can be defined as what the company owns while liabilities are what the company owes. Equity represents the value of the shareholders' interest in the company.
What Assets Does a Balance Sheet Include?
A Balance Sheet typically includes the following assets:
-
Current Assets: Such as cash and cash equivalents, accounts receivable, inventory and other short-term assets that are expected to be converted into cash within one year.
-
Non-Current Assets: Such as property, plant and equipment (PP&E), long-term investments, intangible assets (like patents) and other long-term assets.
What Liabilities Does a Balance Sheet Include?
A Balance Sheet generally includes the following liabilities:
-
Current Liabilities: Debts or obligations that are due within one year, including accounts payable, short-term loans, taxes payable and other short-term debts.
-
Long-Term Liabilities: Debts or obligations that are due after one year, such as bonds payable, long-term lease obligations and pension liabilities.
Equity on a Balance Sheet
Equity on a Balance Sheet represents the shareholders' residual interest in the assets of the company after deducting liabilities.
Equity typically includes paid-in capital and retained earnings. It can also include treasury shares and other reserves.
Importance of a Monthly Balance Sheet
A Monthly Balance Sheet helps businesses:
- Monitor financial health on a short-term basis
- Identify trends and manage cash flows effectively
- Make informed strategic financial decisions and adjustments
- Provide stakeholders with ongoing transparency into the company's performance
At the end of each reporting period, a balance sheet should be reconciled to ensure the amounts represented match their true actuals.
