A balance sheet is a snapshot of a company’s financial position at a single point in time. It lists everything the company owns (assets), everything it owes (liabilities), and the residual claim of the owners (equity). The fundamental identity:
The two sides always balance — by construction. If you bought a $100,000 machine with $30,000 cash and a $70,000 loan, your assets rose by $100,000 (the machine), your cash dropped by $30,000 (net asset change +$70,000), and your liabilities rose by $70,000 (the loan). Both sides moved up by $70,000.
The balance sheet is a stock statement (point in time) and complements the flow statement Income statement (period covering revenues and expenses).
Assets
Current assets are expected to become cash within one operating cycle (typically a year). Used for short-term obligations:
- Cash and cash equivalents — actual cash plus things essentially equivalent (GICs, money-market funds, T-bills).
- Accounts receivable (less allowance for doubtful accounts) — money owed by customers for invoices issued but not yet paid. The “less allowance” reflects the realistic expectation that some won’t pay.
- Inventories — finished goods, work-in-progress, raw materials ready to be sold or used.
Long-term (non-current) assets are held for more than one operating cycle:
- Land, buildings, equipment, vehicles (often grouped as “property, plant, and equipment” or PP&E).
- Intangible assets (patents, trademarks, goodwill from acquisitions).
- Long-term investments.
Liabilities
Current liabilities come due in the short term (1-2 months to one year):
- Accounts payable — amounts owed to suppliers for invoices received.
- Accrued expenses — costs incurred but not yet billed (insurance, utilities, wages earned but not yet paid).
- Short-term borrowings.
Long-term liabilities:
- Long-term debt (mortgages, multi-year business loans, bonds).
- Deferred tax liabilities.
- Pension and other long-term obligations.
Equity
Shareholders’ equity is what’s left over after subtracting all liabilities from all assets — the owners’ residual claim:
- Contributed capital — money the owners put in (stock purchases).
- Retained earnings — past profits not paid out as dividends.
Equity increases when the company earns profit (income flows from the income statement feed into retained earnings) and decreases when it pays dividends.
Limited use of the balance sheet: because it’s a snapshot, it shows the position at one moment in time. A balance sheet drawn at the end of a busy quarter may look very different from one drawn the next day after a big customer payment cleared. For trends, compare balance sheets across multiple dates. For period activity, look at the income statement or statement of cash flows.
For the period-based statements see Income statement and Statement of cash flows. For ratio-based interpretation see Financial ratio analysis. For projected versions see Pro forma financial statements.