Balance Sheet

Balance Sheet - Definition by Business Expert Solutions - Gord Sheppard

What is a Balance Sheet?

A balance sheet is a report that shows your business assets, liabilities, and shareholders’ equity at a specific moment in time. It is one of the three major financial statements that demonstrates what your business owns and owes. It is also known as a statement of financial position and statement of net worth.

A balance sheet paints a picture of how well a business is doing. It also helps investors to understand how profitable a business is because it shows the positive net worth of your business. However, a balance sheet is static, as in, it only reflects what’s happening in a business at one moment in time. It does not show the trends of a business over an extended period of time.

Components of a balance sheet include assets, liabilities, and shareholders’ equity. A typical balance sheet has two sections. One section shows the shareholders’ equity and liabilities while the other section shows the business’s assets.

Balance Sheet – Example

Here is an example of what a balance sheet might look like for the ACME Bakery.

ACME BAKERY

BALANCE SHEET

NOVEMEBER 2021

ASSETS

CURRENT ASSETS

Cash                                                                                                                  200,000

Investments                                                                                                        10,000

Accounts Receivable                                                                                         10,000

Inventory                                                                                                               5,000

Total Current Assets                                                                                       225,000

Property and Equipment                                                                                  40,000

Goodwill                                                                                                              10,000

TOTAL ASSETS                                                                                                  $ 275,000

LIABILITIES

CURRENT LIABILITIES

Accounts Payable                                                                                              15,000

Accrued Expenses                                                                                               4,000

Unearned Revenue                                                                                              6,000

Total Current Liabilities                                                                                     25,000

Long Term Debt                                                                                               150,000

TOTAL LIABILITIES                                                                                            $ 175,000

 

SHAREHOLDER’S EQUITY

Common Stock                                                                                                  50,000

Retained Earnings                                                                                             50,000

TOTAL LIABILITIES + SHAREHOLDER’s EQUITY                                  $275,000

NOTE:

A balance sheet is based on the following accounting principle that states:

Assets = Liabilities + Shareholders’ Equity

So, if you fill in the formula for the ACME Bakery Balance Sheet you’ll get

$275,000 = $275,000

Related Terms

Typical items that can be found on the balance sheet include:

  • Assets: accounts receivable, prepaid expense, fixed assets, cash etc.
  • Liabilities: short term debt, long term debt, accounts payable etc.
  • Shareholders’ equity: common stock, preferred stock, treasury stock etc.

Learn More

If you’d like to go even deeper and answer the question ‘Why Should A Business Owner Understand Their Gross Margin?’ then click on this link.