A balance sheet covers three essential financial categories: a business's assets, liabilities, and equity.
- A company's assets include both its revenue and the amount it would earn from liquidating physical assets like machinery, property, and excess inventory. Assets also include the company's copyrights, investments, and earned interest.
- A company's liabilities include whatever it owes to non-shareholders. The amount could include loans, unpaid wages, income taxes, rent, and interest payments.
- A company's shareholder equity refers to what its shareholders would earn after the company liquidated its assets and paid all its bills.
A balance sheet lists the company's assets on one side (usually the left half) and its liabilities and equity on the other (usually the right half). The two halves of the sheet must equal each other for the sheet to be balanced.
The asset side of the sheet lists assets by how quickly they could be liquidated, starting with current assets like cash and inventory. Current assets also include anything that could either be liquidated or yield returns within a year, such as short-term investments and accounts receivable.
The sheet then lists non-current assets like long-term investments, intangible assets like copyrights, and fixed assets that would take over a year to sell and liquidate—for instance, warehouses or heavy machinery necessary to daily operations.
The liability side of the sheet lists liabilities by how soon each payment is due, starting with current liabilities that are due within a year. Long-term liabilities, which come due more than a year after the balance sheet is created, are listed next.
Shareholders' equity is listed beneath liabilities on the same side of the sheet. This section includes retained earnings, which is income the company reinvests for growth and uses to pay down debt. It should also show the stock invested in the company.