A balance sheet provides a summary of a business at any given time. This report allows you to see the resources available and how they are financed as of a specific date. The balance sheet shows only the assets, liabilities, and owners’ equity (or shareholder loan)
The balances sheet accounting equation: ASSETS = Liabilities + Owners’ Equity. These must equal.
Assets are what the company owns with a value.
Liabilities are what a company owes on loans or other debtors, this includes outstanding payroll expenses, loans payable, taxes.
Owners’ equity is the net worth of the company. This shows the amount of money that is left if all assets were sold and all liabilities are paid. This money belongs to the shareholders, who can either be private owners, or public investors.
What is the purpose of a balance sheet?
There are two different purposes for a balance sheet: internal and external.
When a balance sheet is reviewed internally by business leader, its purpose is to give insight into whether the company is succeeding or failing. This is where the business owners/ managers can adjust their approach. They can correct failures and pivot towards new opportunities.
When a balance sheet is reviewed externally by someone interested in the company, this can be for bank loans or selling the business, this report give external reviewers the insight into what resources are available to the business and how they were financed. Based on this information, potential stakeholders can decide whether it is wise to invest in the company (this can be banking institutions, new owners, or investors). The balance sheet also provides information on how to leverage the liquidity, profitability, and debt-to-equity ratio.
External auditors, might use the balance sheet to ensure the company is complying with any reporting laws it is subject to.
It is always important to remember that a balance sheet communicates information as of a specific date. By this nature the balance sheet is always based on past data. Investors and stakeholders may use the balance sheet to predict future performance of the company, but past performance is no guarantee to future results this is why it is called a forecast.