How Balance Sheet Work?

1. Serves as a Financial Document: The balance sheet serves as a significant financial document for investors and stakeholders to understand the performance of a company. It helps as a reference through which the investors can make decision investment decisions.

2. Compares the Assets and Liabilities: With the help of the balance sheet, current assets and liabilities can be compared to measure the liquidity of the business or determine the rate at which returns can be generated.

3. Depicts the Trend of Performance: Balance sheets from different time periods or rather consecutive periods can be compared to understand the operation and running of a business.

4. Measures Different Financial Ratios: Some of the significant financial ratios can be calculated using the balance sheet. Ratios such as current ratios, debt-to-equity ratios, and assets-to-debt ratios can be measured on a timely basis, i.e., either yearly, monthly, or quarterly.

A balance sheet is one of the significant financial documents which states the financial well-being of a company or business. It is a part of the financial statements that include the balance sheet, income statement, cash flow statement, and statement of retained earnings. The balance sheet consists of the company’s assets, liabilities, and shareholders’ equity considered for a specific period. It depicts the total assets of a company and how these assets are being financed (via debt or equity). The balance sheet is updated timely based on the company’s standards and government policies. The investors rely on the balance sheet to understand what the company owns and owes. Further, the balance sheet serves as the key to financial modeling and accounting.

Geeky Takeaways:

• The balance sheet is a financial statement depicting the worth of a company based on the assets, liabilities, and shareholders’ equity. In other words, a balance sheet is a statement of net worth or a statement of the financial health of a business.
• The basic formula applied to the balance sheet is Assets = Liabilities + Shareholders’ Equity.
• It gives a summary of the financial position of a company and displays the amount the company owns and owes.
• The net worth is the book value of the company and the date or time period on which the assets and liabilities of the company are tallied is known as the reporting date.
• The balance sheet is divided into two categories: Assets (current and non-current assets) and Liabilities (current and non-current liabilities). Here, the non-current assets or liabilities depict the long-term assets or liabilities.