What is Balance Sheet?
The Short Answer
Balance Sheet explained simply
The Balance Sheet is one of the three core financial statements, alongside the Income Statement and Cash Flow Statement. It presents a company's financial position at a specific date, like December 31st. Think of it as a snapshot. It follows the fundamental accounting equation: Assets = Liabilities + Owner's Equity. Assets are what the business owns, such as cash, accounts receivable, inventory, and property. Liabilities are what the business owes to others, including accounts payable, loans, and deferred revenue. Owner's Equity represents the owner's stake in the company, which is the residual value after subtracting liabilities from assets.
Real-World Example
Understanding a Simple Balance Sheet
Let's say a small coffee shop, "The Daily Grind," prepares its Balance Sheet on December 31st, 2023.
Assets:
- Cash: $10,000
- Accounts Receivable (money owed by customers): $2,000
- Inventory (coffee beans, milk): $3,000
- Equipment (espresso machine, furniture): $25,000
- Total Assets: $40,000
Liabilities:
- Accounts Payable (money owed to suppliers): $1,500
- Bank Loan: $10,000
- Total Liabilities: $11,500
Owner's Equity:
- Owner's Capital: $28,500
- Total Owner's Equity: $28,500
Notice that Assets ($40,000) = Liabilities ($11,500) + Owner's Equity ($28,500). This balance confirms the accounting equation holds true for The Daily Grind.
Why this matters
The Balance Sheet is crucial for understanding a business's financial stability and liquidity. It shows how a company is financed and how its assets are distributed. Buyers and lenders use it to assess risk and make informed decisions about a business.
Always review the Balance Sheet alongside the Income Statement and Cash Flow Statement. Each statement tells a different part of the financial story, and together they give a complete picture.
Always review the Balance Sheet alongside the Income Statement and Cash Flow Statement. Each statement tells a different part of the financial story, and together they give a complete picture.
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