The balance sheet is one of the three core financial statements. It gives a snapshot of what a company owns, owes, and is worth at a point in time, governed by the fundamental equation:
Asset
An asset is any resource owned or controlled by the company expected to generate future economic value.
Assets are split by liquidity:
- Current assets — convertible to cash within one year: cash, accounts receivable, inventory, prepaid expenses
- Non-current assets — held longer than one year: property/plant/equipment (PP&E), intangible assets (patents, goodwill), long-term investments
Liability
A liability is an obligation the company owes to external parties.
- Current liabilities — due within one year: accounts payable, short-term debt, accrued liabilities
- Non-current liabilities — due beyond one year: long-term debt, deferred tax liabilities
Equity
Equity (shareholders’ equity) is the residual interest in assets after all liabilities are deducted:
Components include:
- Share capital — proceeds from issuing shares
- Retained earnings — cumulative profits reinvested in the business
- Treasury stock — shares repurchased by the company (reduces equity)
Working Capital
Working capital measures short-term liquidity — whether current assets cover current obligations:
A positive value means the company can meet near-term obligations without new financing.
Accounts Receivable / Payable
- Accounts receivable — money owed to the company by customers (an asset)
- Accounts payable — money owed by the company to suppliers (a liability)
Retained Earnings
Retained earnings are the cumulative net profits kept in the business rather than distributed as dividends:
This is the numerator of in the Altman Z-score.