Definition Of

Balance sheet

Balance sheet is a snapshot of a company’s assets, liabilities, and owners’ equity at a specific point in time. The left-hand side of a balance sheet (or the top, depending on how it is displayed) shows a firm’s assets, while the right-hand side (or bottom) shows its liabilities and owners equity. The assets are listed in order of their “liquidity”, or the length of time it takes to convert them to cash. The liabilities are listed in the order in which they must be paid. A balance sheet must always “balance”, meaning that a firm’s assets must always equal its liabilities plus owners’ equity.

The major categories of assets listed on a balance sheet are the following:

  • Current assets: current assets include cash plus items that are readily convertible to cash, such as accounts receivable, marketable securities, and inventories.
  • Fixed assets: Fixed assets are used over a longer time frame, such as real estate, buildings, equipment, and furniture.
  • Other assets: other assets are miscellaneous assets, including accumulated good will.

The major categories of liabilities listed on a balance sheet are the following:

  • Current liabilities include obligations that are payable within a year, including accounts payable, accrued expenses, and the current portion of long-term debt.
  • Long-term liabilities include notes or loans that are repayable beyond one year, including liabilities associated with purchasing real estate, buildings, and equipment.
  • Owners’ equity is the invested in the business by its owners plus the accumulated earning retained by the business after paying dividends.
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