Balance Sheet

The Balance Sheet Equation

A Balance Sheet always follows this fundamental equation:

Assets = Liabilities + Equity

This equation is always in balance (hence the name “Balance Sheet”). If it’s not, well, you’ve got some accounting gremlins to hunt down! 🕵️‍♂️

Breaking Down the Balance Sheet

Assets: What the company owns or controls

• Current Assets (can be converted to cash within a year):
  • Cash and Cash Equivalents
  • Accounts Receivable
  • Inventory
• Non-Current Assets (longer-term assets):
  • Property, Plant, and Equipment
  • Intangible Assets (like patents or trademarks)
  • Long-term Investments

Liabilities: What the company owes to others

• Current Liabilities (due within a year):
  • Accounts Payable
  • Short-term Debt
  • Current portion of Long-term Debt
• Non-Current Liabilities:
  • Long-term Debt
  • Deferred Tax Liabilities

Equity: What’s left for the owners

• Common Stock
• Retained Earnings
• Additional Paid-in Capital

Why Does the Balance Sheet Matter?

The Balance Sheet isn’t just a bunch of numbers for accountants to geek out over (though they do love it). Here’s why it’s important:

• It shows the financial health of a company at a glance.
• It helps investors understand what the company owns and owes.
• It’s used to calculate important financial ratios (like the debt-to-equity ratio).
• It can reveal potential red flags (like too much debt or not enough cash).

Balance Sheet vs. P&L

Remember, while the P&L (Profit and Loss Statement) tells you how a company performed over time, the Balance Sheet is a snapshot of its financial position at a specific moment. It’s like the difference between watching a movie (P&L) and looking at a photo (Balance Sheet).

Industry-Specific Balance Sheets

Different industries might have different-looking Balance Sheets:

• A manufacturing company might have lots of equipment in its assets.
• A software company might have more intangible assets like patents or software licenses.