Businesses keep financial records so they will know how their company is performing financially. For publicly traded companies (ones you can purchase stock in), these records are also shared with investors. The three main financial statements companies use are the Income Statement, the Balance Sheet, and the Cash Flow Statement.
The balance sheet provides an overview of the value of a company at a specific point in time. It includes a summary of the company’s assets (what they own), liabilities (what they owe), and the owner’s or shareholder’s equity (the amount of money invested by the owner in the business minus any money taken out by the owner). If the company is privately owned, the term “owner’s equity” will be used. If the company is publicly traded, then the term “shareholder’s equity” will be used. Equity represents the value of the company and is calculated by subtracting liabilities from assets.
The balance sheet is sometimes called the “Statement of Financial Position” because it shows a snapshot of the company’s financial condition at a single point in time. This report uses a simple calculation to determine the financial condition. The calculation is called the accounting equation.
The Accounting Equation
|What we own||What we owe||What we’re worth|
What are the Components of a Balance Sheet?
A standard balance sheet has two sides. The assets are listed on the left side, and the financing is listed on the right. The financing includes liabilities and ownership equity. Assets are listed in order of liquidity. Liquidity means how easy it is to convert the asset into cash. Assets are also broken down into current assets (any asset which is expected to be sold or used within the year) and fixed or non-current assets (a company’s long-term investments and assets that are expected to last many years and can’t be easily converted into cash).
|Current Assets||Fixed Assets|
|Cash||Land and building|
|Accounts receivable||Plant and equipment|
Liabilities are listed on the right side of the balance sheet. They are listed in order of when they are due — shortest term to longest term. Liabilities are broken down into current liabilities (debts that must be paid within one year) and long-term liabilities (debts that will be paid over a longer period of time).
|Current Liabilities||Long-term Liabilities|
|Accounts payable||Bonds payable|
|Notes payable||Long-term notes payable|
|Wages payable||Deferred tax liabilities|
|Income taxes payable||Mortgage payable|
Why is it called a Balance Sheet?
Remember the accounting equation: Assets – Liabilities = Owners Equity? Another way to look at the equation is that Total Assets = Liabilities + Owner’s Equity. When you look at the equation this way, it tells you how your assets were financed. Did you have to borrow money (liabilities) or did the owners use their own money (owner’s equity)? After entering your numbers on both sides of the balance sheet, the left and right sides should be equal. They should balance.
Who is interested in the Balance Sheet?
There are many players who are interested in the Balance Sheet:
- Investors: Current and future investors will review the Balance Sheet to view the company’s financial position. The numbers can be used to evaluate a company’s solvency (the company’s ability to pay its overall debt), liquidity (the amount of liquid assets that are available to pay expenses and debts as they become due) and capital structure (the particular combination of debt and equity used by a company to finance its overall operations and growth).
- Lenders/Creditors: If a company is seeking more funding, lenders and creditors will use the Balance Sheet to determine the company’s ability to pay their current obligations before they decided whether or not to grant another loan.
- Management: Managers use the Balance Sheet to keep track of the company’s changing financial position in order to make strategic decisions for growth and to prevent bankruptcy.
Example Balance Sheet for Apple Inc.
Companies often compare Balance Sheets from one period to the next (as shown above) in order to compare side-by-side what is happening to each of the components listed. Are their current assets growing? Are liabilities decreasing? Have they accumulated more debt? Understanding this basic financial statement helps company management set goals and make decisions for the coming year.
Where can I find the Balance Sheet for a specific company?
You can find the balance sheets of every publicly traded company in the United States using the Research tool.
Just open the Research page, and click “Financial Statements” on the left side of the page. You can review the Balance Sheet, Income Statement, and Cash Flow Statement for every publicly-traded company in the United States, going back 5 years.