What Is A Balance Sheet?

 

What is a balance sheet?

A balance sheet is one of the main financial documents that a company uses to organize their financial information. A balance sheet is basically a snapshot of what the company owns and owes at any given moment in time.

A balance sheet is made up of 3 main parts:

  1. Assets
  2. Liabilities
  3. Owner’s equity

The basic equation for understanding a balance sheet is: Assets = Liabilities + Stockholder’s Equity

You can think of it like this: The liabilities are the portion of the assets that the company owes to someone, and stockholders’ equity is the portion of the assets that is owned by the stockholders.

Assets are the things that a company owns, as well as resources the company has. A restaurant’s assets would include the building, its kitchen equipment, and the food it has in stock. This doesn’t mean that assets are paid for. Just like you “own” a car, if you are making car payments on a loan, then your car is an asset but your auto loan is a liability.

Another balance sheet concept that deals with assets is depreciation. Depreciation is something that reduces the amounts reported each year on the balance sheet. For example, let’s say that ABC company bought a new truck for its business for $20,000. ABC estimates that the truck has an estimated useful life of 10 years. You would divide the $20,000 dollars by 10 years, and get depreciation of $2,000 per year. That means that the value of the truck on ABC’s balance sheet would go down by $2,000 every year.

Liabilities are the obligations of a company. Let’s take ABC’s new truck, for example. If they purchased the truck by taking out a loan for the $20,000, then the truck would be listed under assets, and the loan for $20,000 would be listed as a liability, because they have to pay that back to the bank. Other examples of liabilities are bills the company owes, wages owed to employees, or interest owed to banks or other creditors.

The stockholders’ equity portion of the balance sheet is the portion of the assets that the owners, or stockholders own. Because of this, stockholders’ equity will always equal assets minus liabilities. We will explain stockholders’ equity in detail in a later example.

Here is a sample balance sheet:

what is a balance sheet

As you can see, the total assets equals the liabilities + stockholders’ equity.

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