As part of our efforts to educate and inform our readers, we at OnlineAdvisor.com provide articles to explain key financial topics.  The balance sheet is a very important report for financial management of an organization.  With that in mind, it’s necessary to cover what it is and what it provides as part of the fundamental financial reports we need.

The Definition

Investopedia gives a good definition:

The balance sheet is one of the key financial statements issued by publicly owned companies. It summarizes a company’s assets, liabilities and shareholders’ equity. These three parts of the balance sheet show what a company owns, what it owes and how much shareholders have invested in the company.

Accountants like to say that a balance sheet is a “snapshot in time.”  We list all of the financial components of the sheet as of a specific date.

The Equation

This report implements a basic accounting equation:

It gets its name because it requires the two sides of it to “balance out” or equal within itself with the above formula.  Assets cannot be more or less than the combination of liabilities and shareholders’ equity.  Otherwise, the balance sheet doesn’t “balance”.

If you look at a balance sheet, you will see that there are columns.  Numbers are listed on one side or the other.  One column lists the amounts for assets.  Accounts such as cash, inventory and property are on the asset side of the balance sheet.  The other column lists the amounts for liabilities.  On the liability side, there are accounts such as accounts payable or long-term debt.

Lastly, shareholders’ equity represents what money investors have invested in the company, plus earnings.  Earnings left in the company are usually kept for investment, rather than paid out in dividends or used to repurchase shares.

All of this may sound really technical.   However, it is pretty simple.  This report shows what the company is worth, and how it is worth that amount.

What you need to know is the basic principles of what is a balance sheet and what it provides.  Again, it is good to understand the formula that causes a balance sheet to “balance”:

Assets = Liabilities + Shareholders’ Equity