The balance sheet is one of the primary financial statements in accounting.
A financial document that provides a listing of assets, liabilities, and shareholder equity. This is essentially a snapshot in time i.e. as of the end of business on December 31st.
Shareholder equity is usually placed on its own document but typically accompanies the balance sheet. All reporting companies update their this when filing their quarterly and annual reports.
It is a tool for investors to determine the valuation for the business.
The basic formula is:
Assets = Liabilities + Equity
Each side has to balance out. The approach is to total up the assets along with the liabilities. We then can determine the shareholder equity by switching the equation around.
Equity = Assets - Liabilities
There is an order to listing. Assets are usually placed based upon liquidity, i.e. how quickly they can be turned to cash. Liabilities are listed by due date with the nearest listed first.
The balance sheet is often used when extending credit. This applies to both business and individuals. When they go for a loan, the bank will want to determine the feasibility of payment. Looking at the balance sheet can provide insight into the financial health of the borrower.
Double-entry accounting is the foundation of the balance sheet. Each time an asset it added it either has to have a corresponding liability or increases the shareholder equity. In other words, both sides of the equation move in tandem.
