What is a Balance Sheet? Q&A
- What is a balance sheet?
A balance sheet of a company is a financial statement that reports a company's assets, liabilities, and shareholder equity at a given moment in time. It provides a snapshot of a company's finances (what it owns and owes) as of the date of publication.
- What are the components of a balance sheet?
The components are Assets, Liabilities, and Shareholder Equity. Each of these will have several subdivisions.
- How does a balance sheet work?
The balance sheet provides an overview of the state of a company’s finances at a specific point in time. For a complete overview, it should always be compared with balance sheets from previous periods. The balance sheet adheres to this accounting equation Assets = Liabilities + Shareholder Equity.
- What is the purpose of a balance sheet and why is it important?
It is a useful tool used by investors, regulators, executives, and analysts to help understand the current financial situation and health of a business. It is often used with two other financial statements, the income statement and the cash flow statement. Balance sheets from other businesses in the same industry sector should be compared.
- Is a balance sheet useful to get a sense of trends?
No, on its own the balance sheet just gives the situation at a specific moment in time, it cannot give an idea of trends over a longer period. To get a sense of trends over time other financial statements should be consulted as well.
- What are the three core financial statements?
The three core financial statements used for reporting a company's financial performance over a specific accounting period are the balance sheet, the income statement, and the cash flow statement. As mentioned in question 1 above, a balance sheet gives a snapshot of what a company owns and what a company owes. An income statement reports income through a particular time period and focuses on four key items - revenue, expenses, gains, and losses.
Finally, the cash flow statement acts as a link between the income statement and the balance sheet by showing how money moved in and out of the business. This is broken into three sections - operating activities, investing activities, and financing activities.
- Who prepares the balance sheet?
That depends on the company and on its size. The owner or company bookkeeper generally prepares the balance sheet for a small company. For a mid-sized business, it is often prepared internally and then reviewed by an external auditor. However public companies must have external audits and adhere to very specific bookkeeping standards.
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