Balance Sheet- Meaning and Purpose - Management Duniya

Balance Sheet- Meaning and Purpose

Balance Sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

The balance sheet show: Assets = Liabilities + Shareholders’ Equity

A balance sheet thus, provides detailed information about a company’s assets, liabilities and shareholders’ equity.

Assets are things that a company owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched but nevertheless exist and have value, such as trademarks, Goodwill and patents. And cash itself is an asset. So are investments a company makes.

 Liabilities are amounts of money that a company owes to others. This can include all kinds of obligations, like money borrowed from a bank to launch a new product, money owed to suppliers for materials, payroll a company owes to its employees, taxes owed to the government.  Liabilities also include obligations to provide goods or services to customers in the future.

 Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company.

 A company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders’ equity).

 The purpose of a Balance Sheet is to report the financial position of a company at a certain point in time. It is divided into two columns. The first column shows what the company owes (liabilities and net worth). The second shows what the company owns (assets) on the right. At the bottom of each list is the total of that column. As the name implies, the bottom line of the balance sheet must always “balance.” In other words, the total assets are equal to the total liabilities plus the net worth.

 The balance sheet is one of the most important pieces of financial information issued by a company. It is a snapshot of what a company owns and owes at the point in time. The income statement, on the other hand, shows how much revenue and profit a company has generated over a certain period.

 Neither statement is better than the other-rather, the financial statements are built to be used together to present a complete picture of a company’s finances.

Tags: Assets, Balance sheet, investments, liabilities, Meaning, net worth, Purpose, shareholders, Shareholders’ Equity
By: managementduniya