A balance sheet is a financial statement used to show the value of a business at a particular point in time. It is a financial document that helps business managers (and shareholders, if applicable) to assess the business’s financial strengths and weaknesses.
The balance sheet reveals this evaluation by detailing the business’s assets (what it owns), its liabilities (what it owes) and owner’s equity (net worth, or assets less liabilities).
A balance sheet follows the formula ‘Assets = Liabilities + Equity’. This is commonly known as the accounting equation.
- A company’s assets may include property, inventory and cash.
- Liabilities may include long-term debt (such as a start-up loan) or accounts payable by the business.
- Equity includes things like retained earnings and shares.
All three sections of the balance sheet are interrelated. Hence, increases and decreases of each can affect the other two components; for example, assets will increase as liabilities decrease (that is as debts are paid off).
A balance sheet can be created at any time to help to set out the value of the business. In fact, balance sheets should be updated regularly to reflect changes in the business’s financial position.
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