If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.
Balance Sheet
A balance sheet, also known as a "statement of financial position", reveals a company's assets, liabilities and owners' equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company's financial statements.
How the Balance Sheet Works
The balance sheet is divided into two parts that, based on the following equation, must equal (or balance out) each other. The main formula behind balance sheets is:
Assets = Liabilities + Shareholder’s equity
This means that assets, or the means used to operate the company, are balanced by a company's financial obligations along with the equity investment brought into the company and its retained earnings.
Assets
Assets are what a company uses to operate its business.
Liabilities
These are the financial obligations a company owes to outside parties.
Shareholders' Equity
Shareholders' equity is the initial amount of money invested into a business.
Conclusion
The balance sheet, along with the income and cash flow statements, is an important tool for investors to gain insight into a company and its operations. The balance sheet is a snapshot at a single point in time of the company’s accounts - covering its assets, liabilities and shareholders’ equity. The purpose of the balance sheet is to give users an idea of the company’s financial position along with displaying what the company owns and owes. It is important that all investors know how to use, analyze and read one.
Balance Sheet
A balance sheet, also known as a "statement of financial position", reveals a company's assets, liabilities and owners' equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company's financial statements.
How the Balance Sheet Works
The balance sheet is divided into two parts that, based on the following equation, must equal (or balance out) each other. The main formula behind balance sheets is:
Assets = Liabilities + Shareholder’s equity
This means that assets, or the means used to operate the company, are balanced by a company's financial obligations along with the equity investment brought into the company and its retained earnings.
Assets
Assets are what a company uses to operate its business.
Liabilities
These are the financial obligations a company owes to outside parties.
Shareholders' Equity
Shareholders' equity is the initial amount of money invested into a business.
Conclusion
The balance sheet, along with the income and cash flow statements, is an important tool for investors to gain insight into a company and its operations. The balance sheet is a snapshot at a single point in time of the company’s accounts - covering its assets, liabilities and shareholders’ equity. The purpose of the balance sheet is to give users an idea of the company’s financial position along with displaying what the company owns and owes. It is important that all investors know how to use, analyze and read one.
