Balance Sheet

What is the definition of a Balance Sheet?

Definition

The balance sheet is a financial statement that reports a company’s total assets and how these assets are financed either through debt or equity per time. It is one of the three fundamental financial statements used in calculating financial ratios or performing fundamental analysis. They are income statement, statement of cash flows, and balance sheet. It is applicable to both accounting and financial modeling. A balance sheet may also be called a statement of financial position or a statement of net worth.

Formula:

    Assets = Liabilities + Equity

Based on the above formula, a company funds all its assets by either taking up liabilities (borrowing money) or taking from its investors (shareholders’ equity).

Explaining A Balance Sheet

A balance sheet is divided into two sections. On the left section of the balance sheet is listed all the company’s assets. While on the right section of the balance sheet is listed the company’s liabilities and shareholder’s equity. On both sections of the balance sheet the main line items listed are majorly classified by liquidity. Highly liquid accounts such as Cash, Trades, and Inventory Payables are put before lower liquid or illiquid accounts such as Long-Term Debt, and Plant, Property, and Equipment (PP&E).

The assets and liabilities are categorized into two: current asset/liabilities and non-current assets/liabilities.

How Balance Sheet Works

If Amazon takes out a four-year loan worth $5,000 from a bank, its assets (cash account) will increase by $5,000. Its liabilities (long-term debt account) will as well increase by $5,000, so as to balance both sides of the equation. Assuming Amazon takes $10,000 from its investors, its assets will also increase by the same amount, same as its shareholder’s equity. All excess generated revenues will be moved to the shareholders’ equity account as a representation of the owners’ net assets. The revenues will then be balanced on the assets section, reflecting as cash, investment, or inventory.