What Is a Balance Sheet?
A balance sheet is a financial statement that shows what a company owns (assets), what it owes (liabilities), and the owners' stake (equity) at a specific point in time. It's a snapshot, not a period of activity like the income statement.
A balance sheet lists a company's assets, liabilities and equity at one moment in time, proving that Assets = Liabilities + Equity.
- •Current assets (cash, inventory, receivables)
- •Fixed assets (property, equipment)
- •Current liabilities (payables, short-term debt)
- •Long-term liabilities (bonds, loans)
- •Equity (capital + retained earnings)
Step-by-step worked examples
A company reports $60,000 cash, $40,000 inventory, $100,000 equipment as assets; $50,000 accounts payable and $70,000 loans as liabilities. Find equity.
Total Assets = 60,000+40,000+100,000 = 200,000 Total Liabilities = 50,000+70,000 = 120,000 Equity = Assets − Liabilities = 200,000−120,000 = $80,000
A balance sheet shows total liabilities of $250,000 and total equity of $175,000. What are total assets?
Assets = Liabilities + Equity Assets = 250,000+175,000 Assets = $425,000
Current assets are $30,000 and current liabilities are $18,000. Find working capital.
Working Capital = Current Assets − Current Liabilities Working Capital = 30,000 − 18,000 Working Capital = $12,000
Flashcards
Quick quiz
Q1.A balance sheet shows a company's financial position…
Q2.Which is a current asset?
Q3.Total liabilities are $80,000, total equity is $120,000. Total assets?
Q4.Which section shows retained earnings?
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Common mistakes
Thinking the balance sheet shows profit for the year. — Correct: Profit for a period is shown on the income statement; the balance sheet is a point-in-time snapshot.
Listing all assets as 'current'. — Correct: Assets split into current (within a year) and non-current (long-term) categories.
Forgetting liabilities include more than loans. — Correct: Liabilities also include accounts payable, accrued expenses, and deferred revenue.
Assuming equity equals cash on hand. — Correct: Equity is a residual claim (assets minus liabilities), not a cash balance.
FAQ
What is a balance sheet?
A financial statement showing a company's assets, liabilities and equity at a specific date.
What is the balance sheet formula?
Assets = Liabilities + Equity — the same accounting equation underlies every balance sheet.
How do you calculate items on a balance sheet?
List and total assets, list and total liabilities, then equity = total assets − total liabilities.
Can you give a balance sheet example?
A company with $200,000 in assets and $120,000 in liabilities reports $80,000 in equity.