Accounting basics: The Balance Sheet

A balance sheet of any company is a very important financial document which lists the assets, liabilities, and capital of a business for any given period of time.

The balance sheet can provide potential investors with information such as the actual worth of the company. This can be decided after analyising the assets (what the company owns), the liabilities (what the company owes), and the capital (finance invested in the business by shareholders).

A balance sheet is always prepared according to the following formula:

Assets = Liabilities + Capital (Shareholder’s Equity)

The formula is known as the accounting equation or balance sheet equation. It is the basis of the double-entry accounting system where assets are equal to the sum of liabilities and capital, since the assets are generated either with the help of loans etc. (liabilities) and investments (capital).

There is no exact format for preparing a balance sheet. The format varies among different industries and countries. The Balance Sheet along with the Statement of Cash Flows and Profit and Loss Statement is used to make decisions on the company regarding potential investment.