Learn more about what a balance sheet is, how it works, if you need one, and also see an example.
What Is a Balance Sheet?
The balance sheet is the most important of the three main financial statements used to illustrate the financial health of a business. The other two are the income statement and cash flow statement. A balance sheet helps business stakeholders and analysts evaluate the overall financial position of a company and its ability to pay for its operating needs. You can also use the balance sheet to determine how to meet your financial obligations and the best ways to use credit to finance your operations. The balance sheet may also have details from previous years so you can do a back-to-back comparison of two consecutive years. This data will help you track your performance and identify ways to build up your finances and see where you need to improve. Alternate name: Statement of financial position
How a Balance Sheet Works
All accounts in your general ledger are categorized as an asset, a liability, or equity. The items listed on balance sheets can vary depending on the industry, but in general, the sheet is divided into these three categories.
Assets
Assets are typically organized into liquid assets, or those that are cash or can be easily converted into cash, and non-liquid assets that cannot quickly be converted to cash, such as land, buildings, and equipment. They may also include intangible assets, such as franchise agreements, copyrights, and patents.
Liabilities
Liabilities are funds owed by the business and are broken down into current and long-term categories. Current liabilities are those due within one year and include items such as accounts payable (supplier invoices), wages, income tax deductions, pension plan contributions, medical plan payments, building and equipment rents, customer deposits (advance payments for goods or services to be delivered), utilities, temporary loans, lines of credit, interest, maturing debt, and sales tax and/or goods, and services tax charged on purchases. Long-term liabilities are any that are due after a one-year period. These may include deferred tax liabilities, any long-term debt such as interest and principal on bonds, and any pension fund liabilities.
Equity
Equity, also known as owners’ equity or shareholders’ equity, is that which remains after subtracting the liabilities from the assets. Retained earnings are earnings retained by the corporation—that is, not paid to shareholders in the form of dividends. Retained earnings are used to pay down debt or are otherwise reinvested in the business to take advantage of growth opportunities. While a business is in a growth phase, retained earnings are typically used to fund expansion rather than paid out as dividends to shareholders.
Sample Balance Sheet
COMPANY NAMEBALANCE SHEET as at __________ (Date) Incorporated businesses are required to include balance sheets, income statements, and cash flow statements in financial reports to shareholders and tax and regulatory authorities. Preparing balance sheets is optional for sole proprietorships and partnerships, but it’s useful for monitoring the health of the business.
