A balance sheet is a snapshot of a company’s financial condition, showing what it owns and how those assets are financed. A balance sheet lists all a company’s assets (goods, services and intellectual property) on one side and its liabilities and shareholders’ equity on the other. Its goal is to solve an accounting equation by ensuring that the value of the assets equals the sum of liabilities and shareholders’ equity. If this equation is not equal, there is a problem with the accounting, such as a missing entry, an overstatement of assets or an understatement of liabilities.
Most companies prepare a balance sheet on a regular basis, usually at the end of each quarter or fiscal year. It can be a useful tool for both management and investors, providing a clear picture of the company’s current and long-term financial standing. Depending on the size of the business, the balance sheet may be prepared by an accountant in-house or an external auditor.
Regardless of who prepares the balance sheet, its key components include assets, liabilities and shareholders’ equity. Assets are listed first, followed by cash and cash equivalents. In this section, a company also typically reports the balance of any accounts receivable and inventory. A consolidated balance sheet may list the assets of subsidiaries as well, if applicable.
In the liability section, a company will report its short-term debt obligations, such as accounts payable and wages payable. Any loans that are maturing in less than a year are listed as long-term debt, and a company will also usually list its mortgage payments. Any other long-term obligations, such as pension payments and interest on corporate bonds, are also included in this section. The last section of a balance sheet is reserved for Shareholder’s Equity. This account will generally report common stock, plus any contributions made by shareholders and accumulated other comprehensive income.
The most important thing to remember about a balance sheet is that it communicates a company’s worth and health as of a specific date, not as of the moment you read the report. For that reason, a company’s performance over time can be very different from what you see in the balance sheet.
As you read through a balance sheet, be sure to note the date of the report at the top of each section. This will help you to determine which section of the report is currently relevant. The report can also be used to spot trends over time. If the trends are good, this is a sign that a company is healthy and should continue to grow. If the trends are bad, it might be time to make some changes. The sooner you take action, the better the chance that your business will be able to survive a difficult period. Bilanz