What is a Balance Sheet?

A balance sheet is one of the three core financial statements used to evaluate a business and provides a snapshot of a company's finances. It shows a detailed list of a company's assets, liabilities and shareholder equity, as of a specific date. The assets are itemized in one section and the liabilities and equity are itemized in the other. The two sections are said to “balance,” hence the name balance sheet.

The By-Product of the Balance Sheet Equation

The equation equation is assets = liabilities + shareholder equity. This is not just a way to describe the financial structure of a company, but also an indication of how a company's finances must ultimately be managed. Assets should always be equal to the sum of liabilities and equity which means that a company will need to generate profits or take on financing in order to maintain the balance. Having an excess of assets over liabilities and equity implies that the company is investing more than it is taking in and vice versa.

The Use of Balance Sheets in Financial Analysis

Financial analysis using balance sheets can be used to analyze the financial state of any business. Analysts use balance sheets to calculate financial ratios, to compare the ratios of two different businesses, to compare the same company’s ratios over time, and to make industry-specific or company-specific forecasts. Financial ratios derived from the balance sheet can provide insight into the company’s debt, liquidity, efficiency and profitability.

The purpose of the balance sheet is to give users a clear picture of a company's financial status. It shows where it stands today and how it managed its finances in the past to get to the present. The balance sheet is an increasingly important tool for investors, creditors, and other stakeholders who wish to assess a company's financial strength. It provides a foundation for analysis as well as a basis for making decisions affecting the company's future.