A balance sheet is one of the key financial statements provided by a company. Along with the income statement and the statement of cash flows, the balance sheet helps provide a picture of the company’s financial position at given point in time.
What Is a Balance Sheet?
The balance sheet is a statement showing the company’s assets, liabilities and shareholder’s equity at a point in time.
Assets:- Assets represent what the company owns. The asset classifications that you are likely to see on a balance sheet are: Current Assets are assets that convert to cash or that will be used within the next year. Current assets might include:
Liabilities
Liabilities are amounts owed to creditors by the company. The liability classifications you are likely to see on the balance sheet typically include: Current Liabilities are those that will come due within a year. Typical items in this category include:
Accounts payable
Customer deposits, these may be used to hold an item for a customer or a payment to be returned to a customer if they meet certain terms. Sales taxes payable, these are sales taxes collected from customers that need to be remitted to the proper taxing authority by the company. Accrued expenses that have not yet been paid but have been accrued.
Wages payable, they have been accrued but not yet paid. Long-Term liabilities are those that are not due within a year of the date of the balance sheet. Some examples include: Owner’s equity represents the book value of the company. It can also be called stockholder’s equity. Equity denotes ownership in a company. Some classifications in the owner’s equity situation might include:
Common Stock
Common stock is the share class that represents ownership of the company, including the right to elect the board of directors. In the event of liquidation, common shareholders fall behind bond holders, preferred shareholders and most other creditors in terms of having a claim on the company’s assets.
Preferred Stock
Preferred stock is a share class in which the shareholders receive preferential treatment in the payment of dividends. Retained earnings which are the earnings of the corporation to-date less dividends paid to-date.
Put another way, this says that owner’s or shareholder’s stake in the company is what’s left after what the company owes various creditors is subtracted from what it owns. For example, if a company’s assets are $250 million and its overall liabilities are $150 million, then owner’s equity is valued at $100 million.
Importance of a Balance Sheet
Many experts deem the balance sheet to be the most important financial statement to monitor. During the Dot Com bubble and subsequent stock market meltdown from 2000-2002, some analysts pointed to “companies without meaningful balance sheets” as a contributing factor to this market decline.