What is a Balance Sheet?
A balance sheet is a report that shows your business assets, liabilities, and shareholders’ equity at a specific moment in time. It is one of the three major financial statements that demonstrates what your business owns and owes. It is also known as a statement of financial position and statement of net worth.
A balance sheet paints a picture of how well a business is doing. It also helps investors to understand how profitable a business is because it shows the positive net worth of your business. However, a balance sheet is static, as in, it only reflects what’s happening in a business at one moment in time. It does not show the trends of a business over an extended period of time.
Components of a balance sheet include assets, liabilities, and shareholders’ equity. A typical balance sheet has two sections. One section shows the shareholders’ equity and liabilities while the other section shows the business’s assets.
Balance Sheet – Example
Here is an example of what a balance sheet might look like for the ACME Bakery.
ACME BAKERY
BALANCE SHEET
NOVEMEBER 2021
ASSETS
CURRENT ASSETS
Cash                                                         200,000
Investments                                                                                                      10,000
Accounts Receivable                                             10,000
Inventory                                                        5,000
Total Current Assets                                            225,000
Property and Equipment                                         40,000
Goodwill                                                       10,000
TOTAL ASSETSÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $ 275,000
LIABILITIES
CURRENT LIABILITIES
Accounts Payable                                               15,000
Accrued Expenses                                                                                             4,000
Unearned Revenue                                               6,000
Total Current Liabilities                                           25,000
Long Term Debt                                                150,000
TOTAL LIABILITIESÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $ 175,000
Â
SHAREHOLDER’S EQUITY
Common Stock                                                 50,000
Retained Earnings                                               50,000
TOTAL LIABILITIES + SHAREHOLDER’s EQUITY                 $275,000
NOTE:
A balance sheet is based on the following accounting principle that states:
Assets = Liabilities + Shareholders’ Equity
So, if you fill in the formula for the ACME Bakery Balance Sheet you’ll get
$275,000 = $275,000
Related Terms
Typical items that can be found on the balance sheet include:
- Assets: accounts receivable, prepaid expense, fixed assets, cash etc.
- Liabilities: short term debt, long term debt, accounts payable etc.
- Shareholders’ equity: common stock, preferred stock, treasury stock etc.
