What is a balance sheet?

A balance sheet is a financial statement that displays a company’s assets, liabilities, and shareholder equity at a specific point in time.

The balance sheet is based on this fundamental accounting equation:

Assets = Liabilities + Shareholders’ equity

• Assets are economic resources owned by the company that are expected to provide future benefits; assets can be current (cash, accounts receivable, inventory) or non-current (property, equipment, intangible assets)
• Liabilities represent the company’s present obligations or debts that must be paid or settled in the future; liabilities can be current (accounts payable, accrued expenses, short-term loans) or non-current (bonds payable, long-term loans, deferred taxes)
• Shareholder equity represents the residual interest in the company’s assets after deducting liabilities; it includes components such as paid-in capital from issuing stocks, retained earnings, and other reserves

Frequently asked questions

How often should a balance sheet be prepared?

The frequency of preparing a balance sheet varies depending on the company’s size, industry, and specific requirements. Most companies prepare a balance sheet at the end of each accounting period.

What is the difference between assets and liabilities on a balance sheet?

Assets are economic resources owned by the company that are expected to provide future benefits, such as cash, inventory, or equipment. 

Liabilities are the company’s present obligations or debts that must be paid or settled in the future, such as accounts payable, loans, or taxes owed.

Can companies have negative shareholder equity on their balance sheet?

Yes, a company can have negative shareholder equity on its balance sheet. 

This occurs when the company’s liabilities exceed the total value of its assets, resulting in a deficit in equity. Negative shareholder equity can indicate potential financial distress and may raise concerns among creditors and investors.