The balance sheet is a financial statement that shows a company’s financial position at a point in time. The balance sheet format comes in three sections: assets, liabilities, and owners’ equity. The assets represent what the company owns. Then the liabilities represent what the company owes. Finally, the owners’ equity represents shareholder interests in the company. The value of the company’s assets must equal the value of the company’s liabilities plus the value of the owners’ equity.
There are four basic financial statements: balance sheets, income statements, statement of cash flows, and statement of owners’ equity. Of the four, the balance sheet, also called the statement of financial position, is the only one that applies to a specific point in time. The others cover financial activity occurring over a period of time. That’s why the balance sheet is considered a “snapshot” of a company’s financial condition. Typically, you prepare the balance sheet’s accounting monthly or quarterly.
The three sections of the balance sheet consist of line items that state the value of each account within that section. There is no universal format for the balance sheet, so each company’s balance sheet will look somewhat different. This makes balance sheet analysis more difficult than with GAAP compliant reports. However, the basic equation shown above must always apply.
Jake owns an equipment rental company called Equipco. Jake’s company has been steadily growing. Due to this, Jake is interested in receiving a bank loan to finance some additional equipment purchases. He needs to know what his total dollar amount of assets and liabilities are so that he can meet the requirements and preferences of his banker. To do this Jake asks his bookkeeper for the most recent copy of his balance sheet.
Jake is excited to learn that he can qualify for his bank loan. To begin, his total assets value is at an acceptable level. Jake also has enough owners equity to satisfy his bank on the corporate level. Surprisingly, Jake finds that he does not have too many liabilities to qualify. This concern was, as he believed, his major obstacle to earning the loan. According to Jake’s banker, his balance sheet ratios have everything in order to receive his loan. All from one statement!
A balance sheet template free for download and review is available at the S.C.O.R.E. Template Gallery.
If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.
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