What is a 'Balance Sheet'?

A balance sheet reports a company's assets, liabilities and shareholders' equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.

BREAKING DOWN 'Balance Sheet'

The balance sheet adheres to the following equation, where assets on one side, and liabilities plus shareholders' equity on the other, balance out:

Assets = Liabilities + Shareholders' Equity

This is intuitive: a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholders' equity).

For example, if a company takes out a five-year, $4,000 loan from a bank, its assets – specifically the cash account – will increase by $4,000; its liabilities – specifically the long-term debt account – will also increase by $4,000, balancing the two sides of the equation. If the company takes $8,000 from investors, its assets will increase by that amount, as will its shareholders' equity. All revenues the company generates in excess of its liabilities will go into the shareholders' equity account, representing the net assets held by the owners. These revenues will be balanced on the assets side, appearing as cash, investments, inventory, or some other asset.

Source : Investopedia