A balance sheet reports a company's assets, liabilities and shareholders' equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. Balance sheet includes assets on one side, and liabilities on the other. For the balance sheet to reflect the true picture, both heads (liabilities & assets) should tally. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.
The balance sheet adheres to the following equation, where assets on one side, and liabilities plus shareholders' equity on the other, balance out:
Assets = Liabilities + Shareholders' Equity
As you might expect from its name, a balance sheet has to balance. The sum of all the assets a company has must be equal to the sum of all liabilities plus capital and reserves. The format of a Balance Sheet varies – sometimes assets are placed in one column and liabilities & equity in the other – but in KashFlow (known as capital and reserves in KashFlow), everything is shown in a single column.
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A balance sheet has its own importance is understanding a company's financial health.
Comparing a company's current asset to its Current Liabilities provides a picture of liquidity. Ideally, current assets should be greater than current liabilities so the company is able to cover its short-term obligations.
Balance sheet along with income statement gives insights into how efficiently a company uses its assets. For instance, the working capital cycle shows how well a firm manages its cash in the short term.
When you look at how a company is financed, it also indicates how much financial risk the company is taking. For example, comparing debt to equity is a common way of assessing leverage on the balance sheet.