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What Is a Balance Sheet? Definition and Guide

what is a balance sheet

The balance sheet is a statement of a firm’s financial position at a specified time, such as the end of month, quarter or year. The balance sheet will show assets and list any liabilities, giving a statement of what the business owes and owns.

What shows on the balance sheet?

On the balance sheet the firm will record its assets. These will depend on the type of business but typically will include:

  • Cash
  • Petty Cash
  • Accounts Receivable
  • Stock
  • Equipment
  • Land
  • Buildings
  • Advance payments for stock
  • Insurance paid

A record of the assets will show the financial good health of the firm, what it is worth on paper to potential investors or banker when looking for credit.

The firm also records liabilities. This will include such items as:

  • Accounts payable
  • Salaries payable
  • Taxes payable
  • Interest on loans
  • Loans payable
  • Expenses payable
  • Casual labor wages due
  • Leasing agreements for equipment

The principal of the loans payable over the accounting period are only included on the balance sheet, as are the payments due in that time on a leasing agreement.

There are many more assets and liabilities that could be included depending on the type of business. For a typical store, the balance sheet will include most items on these lists. The balance sheet is a picture of the store’s health therefore the store must record all assets and liabilities.

Financial health of business

Any retail business will need to keep a very accurate balance sheet. The storeowner will want to know the financial health of the business before planning for the year ahead or if thinking of expansion. A banker will need to see the balance sheet before deciding on extending credit terms or granting new facilities.

If the storeowner is looking for investors of partners, they will want a look at the current balance sheet. One that shows more in liabilities than in assets will raise questions on the viability of the store. The store may have too much debt to pay or have too many debtors on the accounts receivable entry or creditors on the accounts payable.

A store running a negative balance sheet will be a warning to bankers and others. It is also a warning to the storeowner that the store is under pressure financially and that though the store may seem busy, they may need to adjust to keep a high profit margin over the long term.

Balance Sheet FAQ

What is a balance sheet and what is its purpose?

A balance sheet is a financial statement that summarizes the assets, liabilities, and equity of a business at a particular point in time. Its purpose is to provide a snapshot of the financial condition of a business, showing the resources it has available to generate profits, how it is funded and its overall net worth.

What are the 3 types of balance sheets?

  • Single-step income statement: This type of balance sheet lists only the amounts of income and expense, without any further breakdown.
  • Multi-step income statement: This type of balance sheet lists income and expense items in separate categories and provides a detailed breakdown of each item.
  • Statement of retained earnings: This type of balance sheet provides a summary of the changes in retained earnings over a period of time.

What is balance sheet answer in one sentence?

A balance sheet is a financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time.
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