Definition of a balance sheet in finance

A balance sheet is one of the three financial statements that are used to value a company and to show what it owns or owes. The Balance Sheet lists all assets, liabilities and shareholder's equity attributed to the company. It is always a snapshot of one point in time.

The Balance Sheet is split into three sections:

• Assets - what the company owns or is owed
• Liabilities - any money the company may owe
• Shareholder's Equity - what the shareholders own

One of the most fundamental rules of accounting and finance is that a balance sheet MUST balance (hence the name). Assets will always be equal to Liabilities + Shareholder's Equity.

It is often possible to get a basic understanding of how a company is funded just by looking at the balance sheet. For example, if Long Term Debt and PP&E are both rising every year, it is reasonable to assume that the company is borrowing long-term money in order to finance investments in PP&E. Similarly, if the short term debt is fluctuating along with inventory then it is probable that the company is borrowing to pay suppliers (which it would do if the borrowing rate was very low and it could earn more by investing its cash, and if the company received payment for products before it had to pay back the loans).

A Balance Sheet is constructed either by pulling information and figures directly from a company's filings or by using the Cash Flow Statement and Income Statement to tie back into the Balance Sheet.