What Is a Balance Sheet Used For? Definition and Example

balance sheets for dummies

Balance sheets are used to evaluate a company’s performance and ability to meet its financial obligations. The first is money, which is contributed to the business in the form of an investment in exchange for some degree of ownership (typically represented by shares). The second is earnings that the company generates over time and retains. Because companies invest in assets to fulfill their mission, you must develop an intuitive understanding of what they are. Without this knowledge, it can be challenging to understand the balance sheet and other financial documents that speak to a company’s health.

Liabilities refer to money a company owes to a debtor, such as outstanding payroll expenses, debt payments, rent and utility, bonds payable, and taxes. If you’re new to the world of financial statements, this guide can help you read and understand the information contained in them. Financial statements offer a window into the health of a company, https://www.bookstime.com/ which can be difficult to gauge using other means. While accountants and finance specialists are trained to read and understand these documents, many business professionals are not. An ability to understand the financial health of a company is one of the most vital skills for aspiring investors, entrepreneurs, and managers to develop.

Formatting a Balance Sheet

And if a business reinvests its net earnings into the company at the end of the year, those retained earnings are reported on the balance sheet under shareholders’ or owner’s equity. You can think of financial ratios as compressed bits of information that describe your company’s financial health. The relationships between different numbers on your balance sheet—like your total equity in comparison to your total balance sheets for dummies liabilities—describe how your company is performing. Tracking those ratios over time can tell you how your business is improving at some things, or where there’s space for it to get better. A company’s balance sheet is comprised of assets, liabilities, and equity. Assets represent things of value that a company owns and has in its possession, or something that will be received and can be measured objectively.

When you read through your business’s balance sheet, like the balance sheet shown in this figure, you may notice that it doesn’t have a \”punch line\” like the income statement does. If you want to see more examples of balance sheets, look at the Companies House website. All Limited companies must submit a Balance Sheet each year, which is available to view. For larger companies, they may even have the report on their website. A Balance Sheet is an accounting report required by all companies registered at Companies House and is helpful for self-employed to see their financial health.

Understand Current Assets

The definition of a balance sheet is a financial statement that provides insight into a company’s financial position. It shows in one place how much the business owns (assets) and owes (liabilities). The report is used by business owners, investors, creditors and shareholders.

balance sheets for dummies

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