What Is A Balance Sheet?
The balance sheet is one of the three most important documents—the other two are income statement and the statement of cash flow—that companies produce that enable their investors to examine and assess their financial health. Publicly traded companies are required to produce and publish these documents regularly, usually once per quarter, to shareholders as well as to tax and regulatory authorities.
The balance sheet shows the financial position—essentially, the net worth—of a business at a given point in time. It also displays the listing assets, liabilities and stockholder's equity. The company's assets must equal the sum of its liabilities and stockholders' equity, as follows: Assets = liabilities + equity.
Normally, the company's assets are listed in the left-hand column of the balance sheet, while liabilities and equity are listed on the right. Both sides must balance out, hence the name.
Assets include all of the cash and property at the company's disposal to pay all of its bills. The asset side is usually divided into three parts:
- Current assets include cash on hand, marketable securities that can be easily sold, inventory and supplies.
- Fixed (or non-current) assets include items like the company's property, such as land, buildings and equipment.
- Intangible assets include items like intellectual property, copyrights and patents, the estimated value of the company's brand and trade names, and goodwill, which is the difference between what a company agrees to pay for another company and its fair market value.
Liabilities include all of the money the company owes at that point in time. Liabilities are divided between current and long-term liabilities, as follows:
- Current liabilities include such things as wages and benefits owed to employees, taxes, and short-term debt, that are due in less than one year.
- Long-term liabilities include debts payable longer than one year and long-term pension obligations.
Essentially, the company's equity is the difference between its assets and liabilities. It includes the value of the company's stock plus retained earnings, which are profits held by the company and not distributed to shareholders as dividends.
The balance sheet is a snapshot of the company's net worth at one moment in time. As a result, it's important to compare the most current one to previous ones, such as the previous quarter or the one a year earlier, to check the direction of the company's financial health. Balance sheets can also be used by financial analysts and stockholders to calculate important ratios, such as its debt-to-equity ratio, that show the company's financial well-being.
The balance sheet shows the financial position of a business at a given point in time, listing assets, liabilities and stockholder's equity, where assets equals the sum of liabilities and equity. Both sides must balance out, and publicly traded companies usually publish their balance sheets once per quarter.