What is Balance Sheet?

A balance sheet is a overview of a business’s financial health on any given day. Balance sheet contains detailed information about what a business owns, what it owes, and to whom that money belongs to.

Though there are some tricky terminology, balance sheets come down to balancing three numbers: the amount of assets(things of value), the amount of liabilities (debt), and owner equity (the owner’s share of the company).

How Balance sheet looks like?


What are main constituents of Balance Sheet ?

The main constituents of Balancesheet are Asset, Liability and Shareholder`s capital

Assets=Shareholder`s capital + Liability

What is Asset?

Assets are tangible or intangible resources that are owned by the company and has an economic value which can be expressed and measured in quantitative terms.

Some items that may be seen in the Assets section of a company’s Balance Sheet are:

  • Cash
  • Accounts receivable
  • Patents
  • Equipment
  • Inventory
  • Reimbursable expenses

What is Liability?

Liability is a legal obligation to be paid by the company that it owes to outside parties. Liability is incurred during course of normal business transactions like purchasing of Raw material on credit, statutory liabilities, salary to paid to employees etc.

Some items that may appear in the Liabilities section of a company’s Balance Sheet are:

  • Taxes
  • Accounts payable
  • Credit cards payable
  • Long term loans
  • Current loans
  • Salary payable
  • Bank loans.

What is Shareholders capital?

Shareholders Capital or equity is the amount infused by the owner in its business. It is basically amount left after deduction of liabilities from assets.

Shareholder`s capital =Assets – Liability

Some items that appear in the Capital section of a company’s Balance Sheet are:

  • Owners Capital– Share holdersCapital or equity is the amount infused by the owner in its business.
  • Retained Earnings– It is the part of profit which is retained by organization instead of distributing to its owners as dividends. 

For a balance sheet to be perfect. its total assets must be exactly equal to the total liabilities and shareholders capital. If there is difference then it need to be rechecked for error.

What is Financial ratio analysis in Balance sheet?

Financial ratio analysis uses formulas to gain insight into a company and its operations. For a balance sheet, using financial ratios (like the debt-to-equity ratio) can provide a good sense of the company’s financial condition, along with its operational efficiency. It is important to note that some ratios will need information from more than one financial statement, such as from the balance sheet and the income statement.

The main types of ratios that use information from a balance sheet are financial strength ratios and activity ratios. Financial strength ratios, such as the working capital and debt-to-equity ratios, provide information on how well the company can meet its obligations and how the obligations are leveraged.

This can give investors an idea of how financially stable the company is and how the company finances itself. Activity ratios focus mainly on current accounts to show how well the company manages its operating cycle (which include receivables, inventory, and payables). These ratios can provide insight into the company’s operational efficiency.