Definition: The balance sheet is a financial statement that shows what the business is worth at one point in time. A standard company balance sheet has three parts, assets, liabilities and ownership equity or capital.
The purpose of the balance sheet is to give users an idea of the company’s financial position along with displaying what the company owns and owes. It is important that all investors know how to use, analyze and read this document.
Balance sheet accounts do not show results, even if one can infer this by comparing the balance of accounts from different times.
How the Balance Sheet Works
The balance sheet is divided into two parts that, based on the following equation, must equal each other, or balance each other out. The main formula behind balance sheets is:
Assets = Liabilities + Shareholders' Equity
As the balance sheet is a snapshot at a single point in time of the company’s accounts - the balance sheet, along with the income and cash flow statements, is an important tool for investors to gain insight into a company and its operations.