A company’s balance sheet is a financial statement that reports its assets, equity and liabilities at a given point in time. It’s one of three critical methods of reporting financial performance, along with the income statement and the cash flow statement.
The balance sheet is a tool used by analysts and owners to help determine whether the company can meet its immediate financial obligations, pay its future debts and make distributions to its owners. The CFA Institute gives the process a basic equation: liabilities plus equity equals assets. Equity can be decreased by dividend payments, share repurchases and losses, while it can be increased by generated income and new equity. The result is the owners’ interest in the company’s assets.
The Components of a Balance Sheet
Also sometimes referred to as a statement of financial position, a balance sheet includes three critical classifications of information:
- Assets: Cash on hand, cash equivalents, fair value of property, intangible assets, inventory, equipment, long-term investments and accounts receivable.
- Liabilities: All money the company owes, including wages, payroll and other tax liabilities, dividends payable and various loans.
- Equity: The company’s net value or worth. This can be owner’s equity if you own and operate the business by yourself or operate as a partnership or other small business, or it can be shareholders’ equity or stockholders’ equity. It includes retained earnings, common stock and other items.
The balance sheet helps show that company's assets are balanced with its liabilities and equity sections. This statement comes in a variety of formats, but three are relatively common: the classified balance sheet, the consolidated balance sheet and the sector balance sheet.
The Classified Balance Sheet
A classified balance sheet breaks the critical components of the balance sheet down into further categories. Assets and liabilities are further itemized into subcategories according to whether they’re current liabilities or noncurrent liabilities, current assets or fixed assets, or noncurrent assets.
Examples of long-term assets might be real property, investments or copyrights that are expected to continue paying out over an extended period of time. Current assets would include cash on hand, short-term investments, accounts receivable that are scheduled to come due and be collectible within one year’s time and merchandise that the company expects to sell within a year, according to LibreTexts Business.
Accounts payable and loans payable within a year are considered to be current liabilities as are taxes due and unearned revenue. Long-term liabilities and long-term debt won’t be due and payable for more than a year.
The Consolidated Balance Sheet
The Collaborative Research Group defines a consolidated balance sheet as one that “contemplates the totality of a financial group.” It addresses not just one company, but a group of companies that are in some way affiliated. It omits intercompany transactions to avoid skewing the big picture.
This type of balance sheet also reports assets and liabilities based on how quickly they can be liquidated or will come due, typically in less than a year or more than a year’s time. Consolidated balance sheets rarely contain workforce-related assets.
The Sector Balance Sheet
A sector balance sheet measures business on an even larger scale. It focuses on an entire sector, as the name suggests, typically a market or an industry. The International Monetary Fund publishes a sector balance sheet that reports on the public wealth of 75 countries.
Total assets minus total liabilities on a sector balance sheet usually refers to the sector's total net asset position. Sector balance sheets often consist of current assets, including cash, property and equipment and workforce-related assets, balanced by interest-bearing debt and other liabilities on the liability side.
How to Create a Balance Sheet
Business.org suggests that creating any balance sheet begins with three steps:
- List your assets
- List your liabilities
- List owners’ or shareholders’ equity
Ideally, the assets section will equal the liabilities plus equities columns, but the tricky part can be knowing which financial factors you should include and where to categorize them. You can enlist the help of a CPA or accountant to make sure you get it right, but this can be a pricey option. The expense might be worth it depending on why you need a balance sheet and what type you want to create.
You might consider financial accounting software or account templates if you’re creating a balance sheet mostly for your own edification. You’ll most likely have to pay a monthly fee for the service, but it should be much less than what a professional would charge you.
References
Writer Bio
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.