balance sheet definition _ investopedia

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1/18/2016 Balance Sheet Definition | Investopedia

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DEFINITION of 'B a lance Sh eet'EFINITION of Ba lance Sh eetA financial statement that summarizes a company's assets, liabilities financial statement that summarizes a company's assets, liabilitiesand share holders' equity a t a speci f ic point in time. These three balancend share holders' equity a t a speci fic point in time. These three balancesheet segments give investors an idea as to what the company owns andheet segments give investors an idea as to what the company owns andowes, as well as the amount invested by shareholders.wes, as well as the amount invested by shareholders.

The balance sheet adheres to the following formula:he balance sheet adheres to the following formula:

Assets = Liabilities + Shareholders' Equityssets = Liabilities + Shareholders' Equity

Next Upext Up

TOTAL LIABILITIESOTAL LIABILITIES UNCONSOLIDATEDNCONSOLIDATEDSUBSIDIARYUBSIDIARY ADMINISTRATIVEDMINISTRATIVE

BUDGETUDGETOFF BALANCE SHEETFF BALANCE SHEET

- OBS OBS

BREAKING DOWN 'Bala nce Sheet 'REAKING DOWN Bala nce Sheet The balance sheets g ets its name from the fact that the two sides of the equation above –he balance sheets g ets its name from the fact that the two sides of the equation above – assetsssets on the one side andon the one side and liabilitiesiabilities plusplus shareholders' equityhareholders' equity on the other – must balanceon the other – must balanceout. This is intuitive: a company has to pay for all the things it owns (assets) by eitherut. This is intuitive: a company has to pay for all the things it owns (assets) by eitherborrowing money (taking on liabilities) or taking it from investors (issuing shareholders'orrowing money (taking on liabilities) or taking it from investors (issuing shareholders'

equity).quity).

For example, if a company takes out a five-year, $4,000 loan from a bank, its assets –or example, if a company takes out a five-year, $4,000 loan from a bank, its assets – specifically the cash account – will increase by $4,000; its liabilities – specifically the long-specifically the cash account – will increase by $4,000; its liabilities – specifically the long-term debt account – will also increase by $4,000, balancing the two sides of the equation. If erm debt account – will also increase by $4,000, balancing the two sides of the equation. Ifthe company takes $8,000 from investors, its assets will increase by that amount, as will itshe company takes $8,000 from investors, its assets will increase by that amount, as will itsshareholders' equity. All revenues the company generates in excess of its liabilities will gohareholders' equity. All revenues the company generates in excess of its liabilities will gointo the shareholders' equity account, representing the net assets held by the owners. Thesento the shareholders' equity account, representing the net assets held by the owners. Theserevenues will be balanced on the assets side, appearing as cash, investments, inventory, orevenues will be balanced on the assets side, appearing as cash, investments, inventory, orsome other asset.ome other asset.

Assets, liabilities and shareholders' equity are each comprised of several smaller accountsssets, liabilities and shareholders' equity are each comprised of several smaller accountsthat break down the specifics of a company's finances. These accounts vary widely byhat break down the specifics of a company's finances. These accounts vary widely byindustry, and the same terms can have different implications depending on the nature of thendustry, and the same terms can have different implications depending on the nature of thebusiness. Broadly, however, there are a few common components investors are likely tousiness. Broadly, however, there are a few common components investors are likely tocome across.ome across.

AssetsssetsWithin the assets segment, accounts are listed from top to bottom in order of theirithin the assets segment, accounts are listed from top to bottom in order of their liquidityiquidity ,that is, the ease with which they can be converted into cash. They are divided into currenthat is, the ease with which they can be converted into cash. They are divided into currentassets, those which can be converted to cash in one year or less; and non-current or long-ssets, those which can be converted to cash in one year or less; and non-current or long-term assets, which cannot.erm assets, which cannot.

Here is the general order of accounts withinere is the general order of accounts within current assetsurrent assets :

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Cash and cash equivalentsash and cash equivalents : the most liquid assets, these can includethe most liquid assets, these can include Treasury billsreasury bills andandshort-termhort-term certificates of depositertificates of deposit , as well as hard currency as well as hard currencyMarketable securitiesarketable securities : equity and debt securities for which there is a liquid market equity and debt securities for which there is a liquid marketAccounts receivableccounts receivable : money which customers owe the company, perhaps including an money which customers owe the company, perhaps including anallowance for doubtful accountsllowance for doubtful accounts (an example of a(an example of a contra accountontra account ), since a certain, since a certainproportion of customers can be expected not to payroportion of customers can be expected not to payInventorynventory : goods available for sale, valued at the lower of the cost or market price goods available for sale, valued at the lower of the cost or market pricePrepaid expensesrepaid expenses : representing value that has already been paid for, such as insurance, representing value that has already been paid for, such as insurance,advertising contracts or rentdvertising contracts or rent

Long-term assetsong-term assets include the following:include the following:

Long-term investmentsong-term investments : securities that will not or cannot be liquidated in the next year securities that will not or cannot be liquidated in the next yearFixed assetsixed assets : these include land, machinery, equipment, buildings and other durable, these include land, machinery, equipment, buildings and other durable,generally capital-intensive assetsenerally capital-intensive assetsIntangible assetsntangible assets : these include non-physical, but still valuable, assets such as these include non-physical, but still valuable, assets such asintellectual propertyntellectual property andand goodwilloodwill ; in general, intangible assets are only listed on the in general, intangible assets are only listed on thebalance sheet if they are acquired, rather than developed in-house; their value mayalance sheet if they are acquired, rather than developed in-house; their value maytherefore be wildly understated—by not including a globally recognized logo, forherefore be wildly understated—by not including a globally recognized logo, forexample—or just as wildly overstatedxample—or just as wildly overstated

Liabilitiesiabilities

Liabilities are the money that a company owes to outside parties, from bills it has to pay toiabilities are the money that a company owes to outside parties, from bills it has to pay tosuppliers to interest onuppliers to interest on bondsonds it has issued to creditors to rent, utilities and salaries. Currentit has issued to creditors to rent, utilities and salaries. Currentliabilities are those that are due within one year and are listed in order of their due date.iabilities are those that are due within one year and are listed in order of their due date.Long-term liabilities are due at any point after one year.ong-term liabilities are due at any point after one year.

Current liabilitiesurrent liabilities accounts might include:accounts might include:

Current portion of long-term debturrent portion of long-term debtBank indebtednessank indebtednessInterest payablenterest payableRent, tax, utilitiesent, tax, utilitiesWages payableages payable

Customer prepaymentsustomer prepaymentsDividendsividends payable and otherspayable and others

Long-term liabilitiesong-term liabilities can include:can include:

Long-term debtong-term debt : interest and principle on bonds issued interest and principle on bonds issuedPension fund liability: the money a company is required to pay into its employees'ension fund liability: the money a company is required to pay into its employees'retirement accountsetirement accountsDeferred tax liabilityeferred tax liability : taxes that have been accrued but will not be paid for another taxes that have been accrued but will not be paid for anotheryear; besides timing, this figure reconciles differences between requirements forear; besides timing, this figure reconciles differences between requirements forfinancial reporting and the way tax is assessed, such asinancial reporting and the way tax is assessed, such as depreciationepreciation calculationscalculations

Some liabilities areome liabilities are off-balance sheetff-balance sheet , meaning that they will not appear on the balance sheet. meaning that they will not appear on the balance sheet.

Operating leasesperating leases are an example of this kind of liability.are an example of this kind of liability.

Shareholders' equityhareholders equityShareholders' equity is the money attributable to a business' owners, meaning itshareholders' equity is the money attributable to a business' owners, meaning itsshareholders. It is also known as "net assets," since it is equivalent to the total assets of ahareholders. It is also known as "net assets," since it is equivalent to the total assets of acompany minus its liabilities, that is, the debt it owes to non-shareholders.ompany minus its liabilities, that is, the debt it owes to non-shareholders.

Retained earningsetained earnings are the net earnings a company either reinvests in the business or uses toare the net earnings a company either reinvests in the business or uses topay off debt; the rest is distributed to shareholders in the form of dividends.ay off debt; the rest is distributed to shareholders in the form of dividends.

Treasury stockreasury stock is the stock a company has eitheris the stock a company has either repurchasedepurchased or never issued in the firstor never issued in the firstplace. It can be sold at a later date to raise cash or reserved to repel alace. It can be sold at a later date to raise cash or reserved to repel a hostile takeoverostile takeover .

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Total Liabilitiesotal LiabilitiesThe aggregate of all debts an individual orhe aggregate of all debts an individual orcompany is liable ...ompany is liable ...

Unconsolidated Subsidiarynconsolidated SubsidiaryA company that is owned by a parent company that is owned by a parentcompany, but whose individual ...ompany, but whose individual ...

Administrative Budgetdministrative BudgetAn official, detailed financial plan for ann official, detailed financial plan for anupcoming period for ...pcoming period for ...

Off Balance Sheet - OBSff Balance Sheet - OBSAn asset or debt that does not appear on an asset or debt that does not appear on acompany's balance .. .ompany's balance .. .

Fed Balance Sheeted Balance SheetA breakdown of the assets and liabilities held breakdown of the assets and liabilities heldby the Federal ...y the Federal ...

Financial Statementsinancial StatementsRecords that outline the financial activities of ecords that outline the financial activities ofa business, ... business, ...

Some companies issueome companies issue preferred stockreferred stock , which will be listed separately fromwhich will be listed separately from common stockommon stockunder shareholders' equity. Preferred stock is assigned an arbitrarynder shareholders' equity. Preferred stock is assigned an arbitrary par valuear value —as is commonas is commonstock, in some cases—that has no bearing on the market value of the shares (often, par valuetock, in some cases—that has no bearing on the market value of the shares (often, par valueis just $0.01). The "common stock" and "preferred stock" accounts are calculated bys just $0.01). The "common stock" and "preferred stock" accounts are calculated bymultiplying the par value by the number of shares issued.ultiplying the par value by the number of shares issued.

Additional paid-in capitaldditional paid-in capital or capital surplus represents the amount shareholders haveor capital surplus represents the amount shareholders haveinvested in excess of the "common stock" or "preferred stock" accounts, which are based onnvested in excess of the "common stock" or "preferred stock" accounts, which are based onpar value rather than market price. Shareholders' equity is not directly related to a company'sar value rather than market price. Shareholders' equity is not directly related to a company'smarket capitalizationarket capitalization : the latter is based on the current price of a stock, while paid-in capital the latter is based on the current price of a stock, while paid-in capitalis the sum of the equity that has been purchased at any price.s the sum of the equity that has been purchased at any price.

How To Interpret a Balance Sheetow To Interpret a Balance SheetThe balance sheet is a snapshot, representing the state of a company's finances at a momenthe balance sheet is a snapshot, representing the state of a company's finances at a momentin time. By itself, it cannot give a sense of the trends that are playing out over a longer period.n time. By itself, it cannot give a sense of the trends that are playing out over a longer period.For this reason, the balance sheet should be compared with those of previous periods. Itor this reason, the balance sheet should be compared with those of previous periods. Itshould also be compared with those of other businesses in the same industry, since differenthould also be compared with those of other businesses in the same industry, since differentindustries have unique approaches to financing.ndustries have unique approaches to financing.

A number of ratiosumber of ratios can be derived from the balance sheet, helping investors get a sense of can be derived from the balance sheet, helping investors get a sense ofhow healthy a company is. These include theow healthy a company is. These include the debt-to-equity ratioebt-to-equity ratio and theand the acid-test ratiocid-test ratio ,along with many others. Thelong with many others. The income statementncome statement andand statement of cash flowstatement of cash flows also providealso providevaluable context for assessing a company's finances, as do any notes or addenda in analuable context for assessing a company's finances, as do any notes or addenda in anearnings report that might refer back to the balance sheet.arnings report that might refer back to the balance sheet.

If you want more on the Balance Sheet, check out --f you want more on the Balance Sheet, check out -- Reading The Balance Sheeteading The Balance Sheet andand How Toow ToEvaluate A Company's Balance Sheetvaluate A Company's Balance Sheet .

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