A balance sheet is a financial statement that outlines a company’s assets, liabilities, and shareholder’s equity at a specific point in time. This statement can calculate various financial ratios, which provide insights into a company’s financial health.
The balance sheet equation is: Assets = Liabilities + Shareholders’ Equity
This equation must always balance because a company’s assets are financed by debt (liabilities) or equity (shareholders’ equity).
Assets are everything a company owns and can use to generate revenue. This can include cash, investments, inventory, accounts receivable, buildings, and equipment.
Liabilities are everything a company owes. This can include short- and long-term debt, accounts payable, and deferred taxes. Shareholders’ equity is the portion of the company owned by the shareholders.
It can be calculated as: Shareholders’ Equity = Assets – Liabilities
The balance sheet can calculate important financial ratios, such as the debt-to-equity ratio and the working capital ratio. These ratios provide insights into a company’s financial health and can be used to compare companies within the same industry.