what is a balance sheet? how does it support business? course hero

The balance sheet is one of the three fundamental financial statements and is key to both financial modeling and accounting. The balance sheet displays the company’s total assets and how the assets are financed, either through either debt or equity. It can also be referred to as a statement of net worth or a statement of financial position.

Full Answer

What is a balance sheet?

Balance sheets draw on a simple equation, which is also one of the most basic accounting principles: assets = liabilities + equity. Of course, when we say “simple,” what we really mean is “less complicated than taxes,” but then again, what isn’t? So let’s look closer at what each term means:

Do you really need a balance sheet?

If so, you need a balance sheet. A balance sheet is a straightforward (but crucial!) financial document that balances your assets against your liabilities and equity.

How is the balance sheet used to evaluate the performance of companies?

Rates of Return – The balance sheet can be used to evaluate how well a company generates returns. For example, dividing net income by shareholders’ equity produces Return on Equity (ROE), and dividing net income by total assets produces Return on Assets (ROA), and dividing net income by debt plus equity results in Return on Invested Capital

What are the three components of a balance sheet?

As you will see, it starts with current assets, then non-current assets and total assets. Below that is liabilities and stockholders’ equity which includes current liabilities, non-current liabilities, and finally shareholders’ equity. Example: amazon.com’s balance sheet.

The Accounting Equation

The accounting equation balances assets to the total of liabilities and equity.

Components of the Balance Sheet

The balance sheet gives a snapshot of a company's assets and liabilities at a given point in time; it includes current assets, fixed assets, intangible assets such as goodwill, current and long-term liabilities, and shareholders' equity.

Why are balance sheets important?

Alongside profit and loss statements and cash flow statements, balance sheets can help your business grow, grow, and grow some more.

What is balance sheet information?

The information on a balance sheet gives you, your lenders, and your investors a quick overview of your business’s current financial health. In other words, when you need to take your business’s temperature, a balance sheet is your thermometer. And along with a profit and loss statement (also called an income statement) and a cash flow statement, ...

What is asset in accounting?

Assets refer to your current cash balance plus the dollar amount of anything your company owns, which includes property, equipment, inventory, accounts receivable, and anything else you could liquidate for cash . Liabilities refer to any money owed by your company.

Why do we have assets?

Honestly, it’s kind of confusing, but try thinking of it like this: the only reason you have assets is because you took out a loan from a bank, accepted money from shareholders, or invested your own money in your business. Since your assets stem from a combination of liabilities and equity , the two halves of the equation need to balance.

What is equity in business?

Equity is also called “net worth” or “net assets,” and it’s the amount you or other shareholders would walk away with after debts to non-shareholders get paid off. If you’re the sole owner of your business, you call this owner’s equity.

How to cash out on a sheet?

1. List your assets. On the left half of your sheet, list your assets, starting with the most liquid assets and moving to least. Liquid assets are assets you can easily convert to cash, so you’ll want to start with your cash balance, then list the easiest items to cash out on, then the hardest items to cash out.

What is the right half of a debt sheet?

On the right half of your sheet, list your liabilities, starting with the most current debt owed (i.e., accounts payable, biweekly wages, or utility payments) to the longest-term debt (i.e., a five-year bank loan).