A balance sheet is a financial statement that represents a snapshot of the financial position of a business on a specified date which generally is the last day of any calendar month. A balance sheet is broken up into three sections comprising assets, liabilities and owners equity. The purpose of a balance sheet is to provide users with a financial understanding as to what a business entity owns and owes. Assets are ordered according to how soon they will be converted to cash whereas debts are ordered as to how soon they will be paid.
Assets, liabilities and owners equity each comprise several smaller accounts that identify further breakdown specific reporting categories for an entity.
- Assets are what the entity owns and are referred to as the resources of the entity. Examples of assets are items such as cash, debtors, securities, inventory, land, buildings, equipment, intellectual property and goodwill.
- Liabilities are obligations or amounts owed to other parties. Examples of liabilities are items such as accounts payable, interest payable, bank loans and tax liabilities.
- Owners Equity is the debt an entity owes to the owners and can be viewed as the source of the entities assets. Examples of owners equity can be reported as either shares or retained earnings
A balance sheet is critical document that informs the business owner as to the financial standing of the entity. Others that would be interested in the balance sheet of en entity could be a banker, an investor, suppliers, customers or government agencies.