The balance sheet: A key financial document used to evaluate a company’s financial health

• A balance sheet is a type of financial statement that lists a company’s assets, liabilities, and shareholders’ equity.
• The assets should be in ‘balance’ and equal the total liabilities and shareholders’ equity.
• Balance sheets can provide important financial insight but are also limited to a single day in time.
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A balance sheet is a type of financial statement that outlines a particular business’s assets as well as liabilities, plus the shareholders equity on a specific day. It’s used to evaluate a company’s financial health and is also known as a ‘statement of financial position.’ Businesses use various accounting tools — including a balance sheet — to assess where a company is at financially at a specific point in time.  

How a balance sheet works  

When it comes to evaluating a company’s financial wellbeing, there are different types of financial statements to look at. A balance sheet is just one type of statement and differs a bit from a profit and loss statement (P&L), which is another commonly used financial report used in evaluating a business’ finances. 

“I like to explain to clients that the profit and loss statement is a movie, while the balance sheet is a photo. The P&L reflects income and expenses over time, but the balance sheet shows the company’s financial position within a single fixed moment,” explains Courtney Barbee, owner and COO at The Bookkeeper.

So for example, a P&L statement may be for Q4, a balance sheet may be for one single day at the end of a particular accounting period. 

The balance sheet equation is: Assets = Liabilities + Equity

Let’s review what these parts mean individually: 

• Assets. This refers to items of monetary value. This includes current and non-current assets and is listed in order of liquidity. So for example, you’ll have your current assets which include cash and cash equivalents, accounts receivable, and inventory. Non-current assets can include things like equipment, investments, copyrights and intellectual property 
• Liabilities. This includes money owed for debt or expenses. This also includes current and non-current liabilities. Current liabilities can be accounts payable, current debt obligations, and part of long-term debt obligations. Non-current liabilities may include bonds issued by the company and long-term debt obligations may also be classified under non-current liabilities as well. 
• Equity. This is the equity refers to the shareholders’ equity and includes how much shareholders have invested in the company as well as the retained earnings. The shareholders’ equity can also refer to the net assets, which is the total liabilities subtracted from the total of assets. 

“It’s called the balance sheet because it reflects the accounting equation, Assets = Liabilities + Shareholder’s Equity, in balance,” explains Barbee. “The top portion is the assets: items of value, tangible or intangible, that the company owns. These might include cash, Accounts Receivable, equipment, or even things like a trademark or prepaid expenses.” 

Reading a balance sheet 

Given the name “balance sheet,” the assets and liabilities plus equity must be “balanced.” In other words, the value of your assets must be the same value as the total of your liabilities and equity combined. 

“On the balance sheet, assets are listed in order of how readily convertible they are into cash. Liabilities are listed in order of how soon the requisite payment is due and payable,” explains Phil Weiss, CFA, CPA and principal at Apprise Wealth Management.

When it comes to balance sheet presentation, you can find either a vertical balance sheet such as the one pictured below where items are listed in a column that is read vertically, or up and down. 

There’s also the possibility of a horizontal presentation, where assets and liabilities and equity are side-by-side, read horizontally. In this case, on the right side you’ll see liabilities listed as well as the shareholders’ equity and on the left side, there are the assets listed. Vertical presentation tends to be more common. 

“Beneath the assets are the Liabilities, the things the companies owes. This isn’t just debt such as loans or credit cards, but could also include unearned revenue,” notes ​​Barbee. “Paired with the liabilities is the Shareholders’ Equity. All of the P&L statement, up until the date of the Balance Sheet, is actually housed in this portion as Retained Earnings.”

The balance sheet equity line may include more than meets the eye and can be an important metric for investors to review. 

“It also includes equity that has come in via things like cash infusions or stock sales, as well as equity which has left via distributions. The Liabilities and Shareholders’ Equity sum together to equal the Assets, resulting in the Balance Sheet,” explains Barbee.

Example of a balance sheet

As an investor, you can review important financial statements from publicly traded companies through the Securities and Exchange Commission (SEC). Here’s an example of a balance sheet from Apple Inc. 

As you can see, there are assets divided by current assets, including their subcategories, as well as non-current assets and their respective sub-categories. Below that, you can see current liabilities and non-current liabilities with their respective subcategories. At the bottom, you can review the shareholders’ equity. 

From the image below, you can see the total assets amount matches the total liabilities and shareholders’ equity amount. 

Pros and cons of using a balance sheet  

A balance sheet is one of the key financial statements that businesses should use as part of evaluating their company finances. It’s also possible for investors to review balance sheets of publicly-traded companies to determine their profitability. It’s important to understand the benefits of reviewing a balance sheet and understanding its limitations as well. 

Pros	Cons
Provides a snapshot of liquidity	Has limitations as it doesn’t show growth over time, so it may not be best for predicting the future
Understand overall leverage, when comparing liabilities to equity	Is best used in conjunction with other financial statements, not on its own
Offers insight into a company’s financial health on a single day	Depreciation or the type of accounting method may shift values on the balance sheet, making it appear more profitable

How investors can use a balance sheet 

Investors can look at a company’s assets and liabilities and look at liquidity and returns before deciding to invest in a particular company. “Investors look at balance sheets to help assess a company’s financial viability,” says Weiss.

Another important line to review is the shareholders’ equity line where you can see important information about shares and equity. 

The financial takeaway

A balance sheet is just one of many financial statements that companies and investors alike can use to evaluate the financial picture of a company. It can offer important insights at a specific moment of time, but may not be as useful for looking at growth. In tandem with other financial statements, you can get even greater insights. 

“In general, if you’re trying to understand a company’s financial health, you want to review its income statement, cash flow statement, and balance sheet,” suggests Weiss. “The combination of all three can give a better picture of a company’s financial health than any individual financial statement.” 

That way you have all the information you need to make an informed decision, with all the data available for you to review.