Balance sheet

The balance sheet is one of the most important financial statements, and gives an overview of the company's financial position at a particular point in time, usually at the quarter-end or the year-end. It is built around the equation assets = liabilities + equity. This equation reflects the principle that the company's assets are financed either by liabilities (borrowed funds) or by equity (capital contributed by the owners). The balance sheet is a central part of the accounts, and is used by both internal and external stakeholders to assess the business's financial stability and capital structure.

How is the balance sheet prepared?

The balance sheet is prepared by listing all the assets the company owns or controls, classified according to liquidity, and then showing how those assets are financed.

• Assets: Includes cash, trade receivables, inventory, non-current assets and other resources.
• Liabilities: The company's financial obligations, such as non-current liabilities (for example loans falling due more than one year ahead) and current liabilities (for example trade payables and tax).
• Equity: Consists of the share capital invested by the owners, and the accumulated retained profit or loss over the company's lifetime.

What is the balance sheet used for, and why does it matter?

The balance sheet is important for several reasons:

• Financial stability: Gives a snapshot of the business's financial position, and identifies whether the business has sufficient resources to cover its obligations.
• Capital structure: Shows the relationship between equity and debt, which is important for assessing risk.
• Investor assessment: Gives investors insight into the business's financial health and long-term sustainability.
• Decision support: Helps management make informed decisions about the allocation of resources and about financing.
• Accounting compliance: Necessary in order to prepare the annual accounts, and to meet accounting and reporting requirements.

The balance sheet is decisive for assessing the company's long-term financial health and sustainability, and gives a solid basis for financial decisions and strategic planning. Many central key figures, such as solvency and the liquidity ratios, are calculated directly from the balance sheet. Read more about how Capassa automates key figures.