Balance Sheet

Definition

Serving as a snapshot of finances, a balance sheet shows what a business owns and owes on a given date. It has three main components:

• Assets – Everything the company owns, from cash and accounts receivable to inventory and property;
• Liabilities – What the company owes, including short-term debts like accounts payable, and long-term loans;
• Equity – The net value left over after subtracting liabilities from assets, showing what owners or shareholders actually "own."

The balance sheet follows the equation:

Assets = Liabilities + Equity

Why it matters

A balance sheet shows the company’s liquidity, meaning its ability to cover short-term debts. Investors, lenders, and analysts rely on it to get a sense of profitability, financial stability, and capital structure, helping them make informed decisions about lending, investing, or expanding partnerships. For management, the balance sheet acts as a strategic planning tool, helping assess if resources are well-utilized and if there’s a need to make any changes to support growth.