What is Balance Sheet? Definition of Balance Sheet, Balance Sheet Meaning

The general balance sheet, also known as balance sheet, accounting balance or statement of financial position, is a financial statementthat reflects at a given moment the economic and financial information of a company, separated into three assets : assets , liabilities and equity.

Updating the balance sheet is mandatory at least once a year. It is a public document for all companies, which is quite important for potential investors in those companies.

The balance sheet is a very important tool that offers us basic information about the company at a glance. For example, how much cash does the company have, the amount of debt contracted or the assets it has available. Having such extensive information is vitally important to keep it in order.

The balance sheet is a static financial statement

This document does not inform us of the variation over a period of time, but of the situation at a given time, we can understand it as a photo of the economic and financial structure at a time, usually at the end of the year, which allows you to compare between balance sheets of different years.

Companies, like anyone in their domestic economy, have the need to keep an order to efficiently organize what belongs to them and what they owe or are owed. For this, thanks to accounting , we use the accounting or balance sheet.

Net worth can be calculated as assets minus liabilities. It represents the contributions of the owners or shareholders plus the undistributed results. In the same way, when negative results (losses) occur, they will decrease the Net Equity. The net worth or stockholders' equity also shows the ability of the company to finance itself.

Balance sheet structure

Each of the equity elements,assets , liabilitiesand equity , represent groups of accounting accounts. It is very important that the sum of both parts of the same result.

The asset is what is owned, the liability is owed and the net worth are the financial resources that belong to the company. We can calculate the asset as the liability plus the net worth:

Assets = Equity + Liabilities

The balance sheet has a clearly differentiated structure that is divided into:

Active

It includes all those accounts that reflect the assets and rights of the entity. All assets have the potential to bring money to the business, whether through use, sale, or exchange. It is usually visually located on the left side of the balance sheet.

passive

The liability reflects all the debts and economic obligations that the company has. These debts allow the company to finance its activity and serve to pay off itsassets . They are debts that we have in the present but that we have contracted in the past, such as a bank loan or a purchase with deferred payment.

Net worth

It includes the company's own funds , which are all those elements that constitute the company's own financing , such as the money contributed by the partners, the money accumulated from the benefits obtained in previous years and the company's reserves.

Previously,equityand equity were considered synonymous. However, according to the new international criteria, equity also includes other items, such as accounting adjustments caused by errors or changes in accounting criteria.

Balance Sheet Types

The main types of balance sheets are:

• Comparative: It allows evaluating how the different balance sheet items have evolved over time. This can be done, for example, by adding a column with the variation with respect to the previous year or period.
• Consolidated: It is used by companies with different subsidiaries, gathering all their accounting information in a single balance sheet, as if it were a single company.
• Estimative: It is one that is made with preliminary data that must then be corroborated to have the final version.
• Proforma: It is one that is carried out with projections on the components of the balance sheet. It is a useful tool in project evaluation.

Balance Sheet Example

Let's look at an example of a balance sheet: