Balance Sheet

Quick Definition

A financial snapshot showing what a company owns (assets), owes (liabilities), and the residual value to shareholders (equity).

What is a Balance Sheet?

A balance sheet shows what your company owns (assets), what it owes (liabilities), and the residual value belonging to shareholders (equity) at a specific point in time. Unlike the income statement which covers a period, the balance sheet is a snapshot.

The fundamental equation: Assets = Liabilities + Equity. This always balances, hence the name.

Key Balance Sheet Components

• Assets: Cash, accounts receivable, inventory, equipment, intellectual property.
• Liabilities: Accounts payable, loans, deferred revenue, accrued expenses.
• Equity: Common stock, preferred stock, retained earnings, additional paid-in capital.

Why the Balance Sheet Matters

The balance sheet reveals financial health and stability. Strong assets relative to liabilities indicate solvency. Growing equity shows value creation. Deferred revenue on the balance sheet represents future revenue already collected.

Formula

• Assets = Liabilities + Shareholders' Equity
  This equation must always balance.
• Working Capital = Current Assets - Current Liabilities

Example

Your SaaS company's simplified balance sheet:

• Assets: $500,000 (cash, receivables, equipment)
• Liabilities: $200,000 (payables, loans, deferred revenue)
• Equity: $300,000 (investment + retained earnings)

Assets = Liabilities + Equity
$500K = $200K + $300K ✓

The balance sheet always balances.

Related Terms

• Income Statement (P&L)
  A financial statement showing revenue, expenses, and profit over a period, revealing whether the business made or lost money.

• Working Capital
  The difference between current assets and current liabilities, measuring ability to fund daily operations and meet short-term obligations.

• Current Ratio
  A liquidity ratio measuring ability to pay short-term obligations with current assets.

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