The balance sheet is the summary of a business’s financial status. It is also known as the statement of financial position as it is an overview and all-encompassing snapshot of a business at a particular moment in time. A standard balance sheet is made up of assets, liabilities, and ownership equity.
A company’s possessions are known as assets. Assets can be property or money that the business has on hand, money owed to the business, or money that the business has prepaid. Cash, accounts receivable, and prepaid expenses are examples of Current Assets. Non-Current Assets are items such as property (investment or otherwise), plant and equipment, and even living things, like plants or animals.
Liabilities can include accounts payable, taxes, and provisions for warranties. These are financial obligations of the business. Another liability is unearned revenue, such as when a customer prepays for a service that has yet to be provided.
The third part of the balance sheet is equity, also known as the book value of the company. Essentially, this is total assets minus total liabilities. For a sole proprietor, this is called owner’s equity. For larger corporations, it is referred to as ownership equity and shareholders’ equity, when applicable.
The basic information in the balance sheet provides the overall financial health of a business. It is important for yearly comparisons and pleasing shareholders with valuable numbers in a relatively simple format.