| balance sheet The financial statement of a business or institution that lists the assets, debts, and owners' investment as of a specific date. Assets are ordered according to how soon they will be converted into cash, and debts according to how soon they must be paid. Because balance sheets do not list items at their current monetary value, they may greatly overstate or understate the real value of certain corporate assets and liabilities. Also called statement of financial condition, statement of financial position. See also consolidated balance sheet. |
Balance sheet. A balance sheet is a statement of a company's financial position at a particular moment in time. This financial report shows the two sides of a company's financial situation -- what it owns and what it owes.
What the company owns, called its assets, is always equal to the combined value of what the company owes, called its liabilities, and the value of its shareholders' equity. Expressed as an equation, a company's balance sheets shows assets = liabilities + shareholder value.
If the company were to dissolve, then its debts would be paid, and any assets that remained would be distributed to the shareholders as their equity. Bankruptcy occurs in situations where there is nothing left to distribute to the shareholders, and the company balance sheet is in fact unbalanced because the company owes more than it owns.
A semi-itemized listing of all assets and liabilities of a person or a company in order to arrive at a net worth, which is the difference between the assets and the liabilities. Most lenders require a balance sheet as part of the loan application process.Short-term debt,which will be paid off in one year or less,is treated by lenders in a different manner than long-term debt when calculating their various ratios to determine loan eligibility. As a result, consumers would be well advised to separate the two types of debt when completing a balance sheet form provided by the lender.
One of the primary weaknesses of a standard balance sheet is that it does not reflect any contingent liabilities—matters which may become liabilities in the future,but then again,may simply disappear. These are things like loans guaranteed for children, the results of pending litigation, and penalties and interest that may be imposed at the end of a current tax audit.In accounting,such matters are noted in footnotes. Some mortgage application forms specifically ask about contingent liabilities, and others do not. Obviously, the rosy picture presented in the preceding example balance sheet would change markedly if the owner disclosed involvement in a multimillion dollar lawsuit for which there was no insurance coverage,and which might result in a judgment in the future.
What Does Balance Sheet Mean?
A financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time. The balance sheet gives investors an idea of what the company owns and owes as well as the amount invested by the shareholders. The balance sheet follows the formula assets = liabilities + shareholders' equity. Each of the three segments of the balance sheet has many accounts within it, documenting the value of each one. Accounts such as cash, inventory, and property are on the asset side of the balance sheet, and accounts such as accounts payable and long-term debt fall on the liability side. Accounts on a balance sheet differ by company and by industry, as there is no set template that accurately accommodates the differences between different types of businesses.
Investopedia explains Balance Sheet
It is called a balance sheet because the two sides of the sheet balance out. This makes sense: A company has to pay for all the things it has (assets) by borrowing money (liabilities) or getting it from shareholders (shareholders' equity). The balance sheet is one of the most important pieces of financial information issued by a company. It is a snapshot of what a company owns and owes at that point in time. The income statement, in contrast, shows the company's revenues and profits over a certain period. One statement is not better than the other; together they present a complete picture of a company's finances.
Related Terms:
• Asset
• Income Statement
• Liability
• Retained Earnings
• Shareholders' Equity
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