What is Balance Sheet?
A balance sheet is a financial snapshot that reveals a company's assets, liabilities, and shareholders' equity at a specific moment. It essentially quantifies a company's net worth by outlining what it owns (assets) and how those assets are financed (debt or equity).
This financial blueprint is invaluable for investors, both individual and institutional, as well as internal stakeholders. It offers a clear picture of a company's overall financial health. Furthermore, crucial metrics like profitability, liquidity, and debt levels can be derived from balance sheet data.
How Balance Sheet Works
A balance sheet is a financial picture that shows a company's financial standing at a specific point in time. The core principle is that a company's total assets must equal its total liabilities plus shareholders' equity.
Think of a balance sheet like a weighing scale. For the scale to stay balanced, the weight on one side must match the weight on the other. Similarly, a balance sheet must always balance.
For example, if a company takes a ₹8,00,000 loan from a bank, its assets (cash) increase by ₹8,00,000, and its liabilities (the loan) also increase by the same amount. This keeps the balance sheet in equilibrium.
If the company receives ₹10,00,000 from investors, both its assets (cash) and shareholders' equity increase by ₹10,00,000.
Profits (revenues minus expenses) also impact the balance sheet. These profits increase shareholders' equity. To balance this, the profits are usually invested in assets like inventory, cash, or equipment.
In essence, every financial transaction affects at least two accounts on the balance sheet, ensuring it always remains balanced.
Components of Balance Sheet
A balance sheet is divided into three primary sections as follows:
1. Assets
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Current Assets
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Non-current Assets
2. Liabilities
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Current Liabilities
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Non-current Liabilities