A balance sheet is like a financial snapshot of a company. It shows what the company owns (assets), what it owes (liabilities), and the difference between the two (equity or net worth).
Here’s a simple breakdown of a balance sheet:
1. Assets (What the company owns)
These are things that the company owns and can use to make money. Assets are divided into two groups:
- Current Assets: Things that can be turned into cash within a year, like cash itself, products for sale (inventory), and money owed to the company (accounts receivable).
- Non-Current Assets: Things that are valuable over a longer period, like land, buildings, and machinery.
2. Liabilities (What the company owes)
These are the debts or obligations the company has to pay. Liabilities are also divided into two groups:
- Current Liabilities: Debts that need to be paid within a year, like bills, short-term loans, or wages the company owes.
- Non-Current Liabilities: Debts that take longer to pay off, like long-term loans or bonds.
3. Equity (What the owners own)
This is the value left over after subtracting the company’s debts (liabilities) from its assets. It’s what the owners actually “own” after all the bills are paid. It includes:
- Investments made by the owners (shareholders).
- Retained Earnings, which are profits the company kept instead of paying them out as dividends.
In simple terms:
The balance sheet helps show:
- What the company owns (assets).
- What the company owes (liabilities).
- The value left for the owners after all debts are paid (equity).
Everything must balance, meaning: Assets = Liabilities + Equity.
This simple equation is the foundation of the balance sheet! It helps people understand how financially healthy the company is.