Balance sheet

Balance sheet

What is a balance sheet?

A balance sheet is a summary of the financial balances of a company. A standard company balance sheet has three parts: assets, liabilities and shareholders' equity.

These three items show investors how much the company owns and owes, plus the amount invested by its shareholders. The assets always equal the liabilities and equity combined.

The balance sheet is drawn up at least once a year as part of the company's accounts. It is also often published quarterly to provide a detailed picture within a shorter time frame.

It is called a balance sheet because assets balance the liabilities plus equity. The company's assets (what it owns) have to be paid for, either through debt (by borrowing money), which is its liabilities, or by raising the money from shareholders (the equity).

The balance sheet's importance for traders and investors

The balance sheet is a key part of the financial statements that help investors analyse the value of a stock. The other financial statements are the cash flow, income and profit and loss (P&L). Together they show the financial health of a company.

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The ability to read between the lines of a balance sheet gives investors an idea of what's going on inside a company. Comparing a current balance sheet to previous ones can show whether a company is growing, stagnating or in difficulty and can help decide if the company is worth investing in.

Note that the balance sheet shows a company's financial position for just one single day at its fiscal year end. This is usually the last day of the firm's accounting period and the date will be displayed as follows: "Balance sheet as at 31 December 2012".

Understanding the balance sheet

The balance sheet is usually broken down in detail so that investors can see the different elements that make up the assets, liabilities and equity.

Assets

Cash, inventory and real estate or property are all assets. There may also be items such as securities and tangibles on the balance sheet. A high amount of assets can be a good indicator of sales growth. Assets are usually listed in descending order of their liquidity, or how quickly they can be converted into cash.

Liabilities

On the liability side of the balance sheet all forms of the company's debt will be declared, such as bank loans, monies owed to suppliers, taxes due, leases, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are usually listed in the order of priority for being paid off or paid down, with current (short-term) liabilities generally being listed higher than non-current (long-term) liabilities.

Equity

The equity shown on the balance sheet will be broken down to show how many shares are owned by external investors and how many by the company, how many shares are in free float, and what proportion of shares are either common shares or preferred shares (which determines voting rights).

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