Balance Sheet

Investment Dictionary -> Balance Sheet

The balance sheet or the statement of financial position reveals the individual's or company`s assets, liabilities, and owner's equity. The balance sheet equates the assets to the sum of the liabilities and the owner's equity. In other words, the assets are balanced with the financial obligations and the equities. The assets are divided into current and fixed or long-term assets. The category of current assets contains accounts receivable, cash and cash equivalents, inventory, prepaid expenses, and short-term investments. The fixed assets refer to real estate, machinery, tools, and buildings. Other long-term assets include intangible assets, investment in real estate, biological investment (asset in living stock), financial assets, and investment via the equity method.

Liabilities refer to the financial obligations of the entity to outside parties. They may give rise to the transfer of assets or to the provision of different services. Liabilities are also divided into current and long-term liabilities. The category of current liabilities comprises of financial obligations that are payable within one year. These are short term borrowings, wages, taxes, and others. The long-term liabilities include obligations that are due at least one year after the balance sheet has been prepared. They include long-term bond repayments, long-term leases and product warrantees, pension obligations, etc.

The owner`s equity represents the initial capital that is invested in the entity. Then, the equity also refers to the funds that are owed to the company owners after the payment of liabilities. In other words, it is the owner`s interest in the business entity. The entity comprises of tangible and intangible assets. It includes assets such as preferred and treasury stock, capital surplus, retained earnings, and others. The term shareholder`s equity is used if the owners are shareholders. The investors will be interested in both, changes in the equity and increases or decreases in the value of their individual shares. Finally, the market value of the shares does not match the owner`s equity per share. The market value is determined by factors such as cash flows, profits, and other components of the accounting statements.

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