What Is a Balance Sheet?

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The balance sheet is the primary financial statement that shows a company’s resources (assets), liabilities and owner’s equity at a point in time. It lists assets on the left side and liabilities and equity on the right, consistent with a basic accounting equation where total assets must equal total liabilities plus shareholders’ equity.

A company’s assets are its physical possessions that have a monetary value, including cash, property and equipment. Other assets can include marketable securities (investments), prepaid expenses and money owed to the business by customers (accounts receivable). Intangible assets, such as patents and trademarks, also are included. Companies use the balance sheet to assess their efficiency by comparing how much revenue they generate with how much they spend on assets, and to see whether they are able to cover their debt obligations and make distributions to shareholders.

Liabilities are what the company owes to other parties and can be broken down into two categories: current and long-term. A company’s current liabilities may include accounts payable, bills and notes due within a year, payroll, taxes and utilities. The long-term liabilities category contains the company’s mortgage payments, bonds payable and pension obligations. The last item on the balance sheet is the company’s shareholder’s equity, which consists of the amount of capital investors have invested in the business, plus any profits the business has made and any additional cash contributions it has received from shareholders.

The balance sheets of public companies are required to adhere to strict guidelines set forth by the International Accounting Standards Board and many country-specific organizations/companies, including the United States’ Generally Accepted Accounting Principles (GAAP). While a company’s internal systems may vary from one system to another, the overall principles remain the same.

While a balance sheet is a valuable tool, it’s important to understand that the figures listed are only estimates and may change significantly between reporting periods due to various factors, including the company’s accounting methods and depreciation policies. The numbers are also subject to professional judgement, which is why it’s important for companies to keep their records well organized and be vigilant in reviewing and adjusting the amounts reported on the balance sheet. This includes continually assessing accounts receivable to identify potential uncollectible amounts, and using conservative estimates of fair values for intangible assets like patents and trademarks. Bilanz

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