What is a balance sheet?
The balance sheet is like the financial equivalent of a school report: it gives investors an overview of a company’s performance at a specific moment in time.
It details a company’s assets, its liabilities and its shareholders’ equity.
Where have you heard about balance sheets?
The balance sheet tends to be published at the end of a fixed trading period, such as a financial quarter. Since balance sheets gauge the performance of a company, the term often hits the headlines when a business is having a tough time.
What you need to know about balance sheets...
The balance sheet is based on a simple formula, assets = liabilities + equity. The two sides of this formula must be made to balance out.
Assets are things of value which a company controls but not necessarily owns. So as well as cash and securities they might include debts you expect to recover. Liabilities would include things like taxes, unpaid debts to suppliers, interest on bonds and salaries to employees.
Subtract liabilities from assets and you are left with the shareholders’ equity – the money in the business that is owned outright.
Comparing current and previous balance sheets gives an idea of a company’s performance over time, while comparing the balance sheets of different businesses can help investors decide where to put their money.