A balance sheet is also known as a statement of financial position. It is one of the four basic kinds of financial statements. The other three are income statement, statement of retained earnings, and statement of cash flows. As compared to the other three basic kinds of financial statements, the balance sheet is the only statement that refers to a single point in time.
In a nutshell, when applied to a company or a business, the balance sheet simply shows what the company’s financial status is. The statement of financial position reflects what the company owns and what the company owes; hence the idea of balance. The company’s balance sheet is comprised of three main parts. These are:
1. Assets
2. Liabilities
3. Ownership equity
Assets refer to what the company owns while liabilities refer to what the company owes. Ownership equity is the shareholders’ value. These parts make up the following equation:
Assets = liabilities + ownership equity.
A balance sheet can also be applied to personal circumstances. This is usually called a personal balance sheet. The basic principle is the same, minus the element of ownership equity. A personal balance sheet is merely the assets minus the liabilities of an individual. This amounts to the person’s net worth.
The above description is a general overview of a balance sheet. Depending on the company or the individual, the details of a balance sheet will vary. Details may include cash, accounts receivable, accounts payable, property, tools, etc.
