What is a balance sheet?

Understanding balance sheets and how to use them.

Similar to bank statements, balance sheets are a financial statement that reports a company’s assets, liabilities and owners’ equity at a particular point in time. Balance sheets help to illustrate a business’s net worth.

The balance sheet is, in essence, a financial statement that provides a snapshot into what a company owns and owes, as well as the amount that is invested by shareholders. It’s used by businesses – alongside other important financial statements such as the income statement or bank statement – to conduct fundamental analysis or calculating financial ratios.

Key takeaways from this section:

  • A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity
  • Balance sheets are one of the three main financial statements that are used to evaluate a business – alongside the income statement and the statement of cash flows.
  • The balance sheet is a snapshot into a company’s finances and illustrates a business’s net worth.
  • Balance sheets can also help business stakeholders and analysts evaluate the overall financial position of a company.

Understanding balance sheets

The balance sheet represents the state of a company’s finances at a particular moment in time. It shows what a company owns and owes and exactly how much shareholders have invested.

A typical balance sheet will detail a company’s assets (cash, inventory, property etc), liabilities (rent, wages, utilities, taxes, loans etc) and shareholders’ equity (retained earnings). The formula used is as follows:

Assets = Liabilities + Shareholders’ Equity

The balance sheet is an essential tool used by a wide variety of people within a business including executives, investors, analysts and regulators in order to understand the current financial health of a business. It is mainly used alongside the income statement and cashflow statement to allow users to get a snapshot view of the assets and liabilities of a company.


Breaking down the balance sheet

As mentioned above, the balance sheet is made up of three main aspects: assets, liabilities and shareholders equity.

Assets

Assets are split into long-term and short-term assets. Short-term assets include cash and cash equivalents, marketable securities, accounts receivable, inventory, prepaid expenses etc whilst long-term assets include fixed assets, intangible assets and long-term investments. These assets are listed from top to bottom in order of their liquidity.

Liabilities

Current liabilities may include current portion of long-term debt, bank indebtedness, interest payable, wages payable, customer prepayments, dividends payable and others, earned and unearned premiums, accounts payable etc.

Long-term liabilities can include deferred tax liability and long-term debt. It’s important to note that some liabilities are considered off the balance sheet so they will not appear.

Stakeholder Equity

This is the money attributable to a business’s owners or shareholders and is what remains after subtracting the liabilities from the assets. It is also known as net assets as it is equivalent to the total assets of a company minus liabilities.


Balance Sheet FAQs

What is a balance sheet?

A balance sheet is a financial statement that details and reports a company’s assets, liabilities and shareholder equity at a particular point in time. Balance sheets represent the state of a company’s finances and is used for various business analysis and calculations.

What is the formula used on a 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 + Shareholder Equity

This formula is fairly intuitive – a company has to pay for all of its assets by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholder equity).


Have you thought about Invoice Finance as a cash flow solution for your business?

Invoice finance allows you to release cash quickly from your unpaid invoices.

As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.

We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.


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The benefits of invoice finance companies such as Novuna Business cash flow

  • Boost your cash flow without having to wait up to 120 days for your customers to pay you

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