Why is it called a balance sheet and why should I care?

Dear M & M:

I was looking over some financial statement templates and came across a balance sheet. Why do they call it a balance sheet and why should I care?


Dear Donny:

The purpose of a balance sheet is to show the financial position of a company on a certain date. Many times it is also called a statement of financial position and is dated a certain date. A balance sheet will show all the business assets or resources that are equal to the sources or claims against those assets. In the beginning the sources or claims consist of the company’s liabilities and stockholder’s equity.

The simple formula is assets = liabilities + owner’s equity. In short, it explains what the company owns, owes and the amount of money the shareholders have put in. Going deeper a balance sheet has two sides. Each side must balance out. On one side are the assets (cash, inventory, land, buildings) on the other side it shows how the company paid for them.

It could have been from a loan or from the shareholders. Money given to the company from shareholders to purchase assets is called shareholders equity. Each of these three segments on a balance sheet (Assets, Liabilities and Owners Equity) will have separate accounts associated with them.

As previously stated cash, inventory, land, buildings are on the asset side of the balance sheet, accounts payable, long term debt and owners’ equity are on the other side of the balance sheet. Remember the three parts to a balance sheet are the assets (items of value; cash, accounts receivable, inventory, buildings, equipment) liabilities (obligations to pay; loans, taxes, accounts payable) and equity; (earnings or capital investments from the shareholders).

A balance sheet is used to determine the financial position of a company. Do they have enough assets to pay what they owe? When balance sheets are reviewed in a sequence, changes in assets and liabilities can be used to obtain information to get a picture of the company’s position in regards to liquidity and ability to payback what they owe. Lenders can make decisions on whether the company is in a position to take on more debt.

Remember a balance sheet is one of three financial statements you should be familiar with when running any business. The statement of cash flows and income statements are two other financial statements all businesses should be monitoring.


To ask your questions: Call the Small Business Development Center (SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation(EDF) at 520-458-6948 or email  hollism@svedf.org


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