A balance sheet is a fundamental financial reporting document that is important for the business planning of companies of all sizes. It helps you see the net worth of your company at a specific moment in time, which is why many lenders require these reports.
What Is a Balance Sheet?
A balance sheet is a financial report that provides an immediate picture of your business’s financial situation. It showcases what your company owns and owes, as well as what has been invested in it.
At the heart of the balance sheet is a simple formula: your assets equal your liabilities plus equity. Essentially, a balance sheet shows what your company is worth.
What Are the Components of a Balance Sheet?
Balance sheets have 3 parts: assets, liabilities, and shareholders’ equity. Shareholders’ equity is sometimes called owners’ equity. The total of your assets should equal your liabilities plus owners’ equity.
Assets include cash in your bank account, inventory, real estate, and accounts receivable. Liabilities most commonly include debts. Shareholders’ equity includes capital, stock, and retained earnings, which equals all your revenue minus all your expenses since the launch of your business.
Should Your Balance Sheet Balance?
Every balance sheet should balance. Your total assets should equal your total liabilities plus shareholders’ equity.
The equation makes sense. You pay for your assets by either taking out liabilities, such as receiving funding from a bank or obtaining money—equity—from the company’s owners, or by a combination of the 2.
If your company’s liabilities overwhelm your assets, your owners’ equity can be negative.
Why Is a Balance Sheet Important?
Along with a cash flow statement and a profit and loss statement, many lenders will require a balance sheet when making loan decisions. Beyond this, a balance sheet is important for your records because it helps you understand how your company is faring at the time.
Over time, balance sheets provide context for how your company is performing. You can see how your company grows by looking at your balance sheets from the past and comparing them to your current records.