In financial accounting, a balance sheet or statement of
financial position is a summary of the financial balances of a sole
proprietorship, a business partnership, a corporation or other business
organization, such as an LLC or an LLP. Assets, liabilities and ownership
equity are listed as of a specific date, such as the end of its financial year.
A balance sheet is often described as a "snapshot of a company's financial
condition".
Of the four basic financial statements, the balance sheet is
the only statement which applies to a single point in time of a business'
calendar year. A standard company balance sheet has three parts: assets,
liabilities and ownership equity. The main categories of assets are usually
listed first and typically in order of liquidity. Assets are followed by the
liabilities. The difference between the assets and the liabilities is known as
equity or the net assets or the net worth or capital of the company and
according to the accounting equation, net worth must equal assets minus
liabilities.
Another way to look at the same equation is that assets equal
liabilities plus owner's equity. Looking at the equation in this way shows how
assets were financed: either by borrowing money or by using the owner's money.
Balance sheets are usually presented with assets in one section and liabilities
and net worth in the other section with the two sections "balancing."
A business operating entirely in cash can measure its profits by withdrawing
the entire bank balance at the end of the period, plus any cash in hand.
However, many businesses are not paid immediately; they build
up inventories of goods and they acquire buildings and equipment. In other
words: businesses have assets and so they cannot, even if they want to,
immediately turn these into cash at the end of each period. Often, these
businesses owe money to suppliers and to tax authorities, and the proprietors
do not withdraw all their original capital and profits at the end of each
period. In other words businesses also have liabilities.
