Definition of Balance Sheet

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Balance sheet is one of the four major financial statements of a company or entity.

Balance sheet portraits an entity’s economic and financial status on a given date. It’s a summary of entity’s assets, liabilities and equity on a certain date.

It’s like a photograph of an organization’s financial health taken on a specific time. Generally, a balance sheet is prepared at the end of financial year.

By reading a balance sheet, we can tell, what the company owns (the assets) and what it owes (the liabilities), in other words, the resources committed to financing its assets (share capital, debt etc).

Balance sheet items or components

Balance sheet is a fundamental accounting process. It’s the major source of information for financial analysis and to remodel the organization’s capital structure.

Balance sheet items or components are:

  • Assets – Current assets + Non-current / Long Term assets
  • Liabilities – Current Liabilities + Long Term Liabilities
  • Equity – Common stock + Retained Earnings

Balance sheet sample

Sample balance sheet of ABC Company Inc

Balance Sheet Sample

Balance sheet formula

Here is the balance sheet formula or balance sheet equation. The essence of the balance sheet formula is on a given date the sum of assets and liabilities of a company must be the same.

Assets = Liabilities + Shareholders’ Equity

Balance sheet is a document that reflects in monetary value all the assets held by a company (assets) and their sources of financing (liabilities). The sources of financing may be the owner(s) of the company (Shareholder’s equity) or third parties (debt).

Therefore, liabilities are made up of debt and equity, and their sum must be equal to assets.

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