The balance sheet is a financial statement that summarizes a company’s assets, liabilities and net worth at any given time. These three segments of the balance sheet give investors an idea of what a company holds and owes, as well as the amount invested by shareholders.
The balance sheet is given by the following formula:
Assets = liabilities + equity
What is the balance sheet
In the balance sheet, the two parts in the above equation - assets on the one hand and liabilities plus equity on the other - must balance. The reason is intuitive: a company has to pay for all the assets it holds (assets) by borrowing money (assuming liabilities) or taking it from investors (issuing equity).
For example, if a company opens a five-year loan in a bank for a value of 4,000 euros, its assets - in particular its liquidity - increase by 4,000 euros; its liabilities, in particular its long-term debt, also increased by € 4,000, balancing the two sides of the equation. If the company demands € 8,000 from investors, its assets increase by that amount, as does its net worth. Any excess revenue generated by the company over its liabilities will increase the equity held by the owners. These revenues will be balanced on the asset side, which appears as cash, investments, inventory or other assets.
Assets, liabilities and equity are made up of several smaller accounts that distinguish the specificities of corporate finances. These accounts vary by industry and the same terms may have different implications depending on the nature of the business. In general, though, there are some common components that are useful for investors to know.
Activities
Within the asset segment, accounts are listed from top to bottom in order of liquidity, i.e. the ease with which they can be converted into cash. They are divided into current assets, those that can be converted into cash in a year or less and into non-current or long-term assets, which cannot be converted.
Here is the general order of the accounts within current assets:
- * Cash and cash equivalents: the most liquid assets, including Treasury securities and short-term certificates of deposit, as well as money reserves
- * Negotiable securities: equity securities and debt securities for which a liquid market exists
- * Credits: Money that customers owe to the company, including doubtful account provisions
- * Inventory: assets available for sale, valued at the lowest cost or market price
- * Prepaid expenses: represent the value already paid, such as insurance, advertising contracts or rent
Long-term assets include the following:
- * Long-term investments: securities that will not or cannot be liquidated in the next year
- * Fixed assets: includes land, machinery, equipment, buildings and other durable assets
- * Intangible fixed assets: include non-physical but still valuable assets such as intellectual property and goodwill; in general, intangible assets are only listed on the balance sheet if they are acquired, rather than developed on their own - their value can therefore be minimized by not including, for example, a globally recognized logo
Liabilities
Liabilities are the money a company owes to third parties, from the invoices it has to pay to suppliers to the interest on the bonds it has issued to rent and salaries. Current liabilities are those due within one year and are listed in order of due date. Long-term liabilities are due at any time after one year.
Current accounts payable can include:
- * Current portion of long-term debt
- * Bank debt
- * Interest to be paid
- * Rent, taxes, utilities
- * Salaries
- * Prefixes of the client
- * Dividends payable and more
Long-term liabilities can include:
- * Long-term debt: interest and principle on the bonds issued
- * Pension Fund Liability: The money a company has to pay into its employees’ retirement accounts
- * Deferred tax: taxes accrued but which will not be paid for another year;
- * Some off-balance sheet liabilities, which means they will not appear on the balance sheet, such as operating leases
