A balance sheet is a snapshot of financial health, showing what a company or person owns and owes at a specific point in time.
Balance sheets always follow the same formula:
Assets = Liabilities + Equity
An asset can be anything that provides or will provide a benefit. If you’re a cafe, assets would include the cash in your register plus the supplies and machines you have on hand for whipping up americanos.
A liability is an obligation that will require a company (or you) to spend resources in the future. Following the same example, that cafe’s liabilities could be the money borrowed to set up shop plus the wages owed to baristas.
Equity means ownership, and it’s what’s left of the assets after subtracting the liabilities. This is what a business or person owns free and clear.
A company’s balance sheet might show some of these items:
|Cash and investments
|Paid-in capital (i.e., what owners have paid into the company)
Retained earnings (i.e., accumulated profits)
“The two most important things in any company do not appear on its balance sheet: its reputation and its people.“
Investors may use a company’s balance sheet to:
Lenders may use a company’s balance sheet to:
Company insiders may use the balance sheet to:
And you can use your own balance sheet to:
As you read a balance sheet, it’s good to keep in mind this general accounting rule: A balance sheet should always balance. Just like two plus two always equals four, liabilities plus equity should always equal assets.
An unbalanced balance sheet might indicate either an error in the math, misallocated assets and liabilities, or the need to call a financial expert.
A balance sheet shows the assets, liabilities, and equity of a person or company at a specific moment in time. Balance sheets are one part of the toolbox for analyzing a business or individual’s financial health.