🗂️ Balance Sheet

Definition: A financial statement showing a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It is a snapshot of what the company owns and owes.

The fundamental accounting equation: Assets = Liabilities + Equity Together with Income Statement and Cash Flow Statement, it forms the three core financial statements.

📐 The Accounting Equation

$Assets = Liabilities + Shareholders’ Equity$

Intuition: Everything the company owns (assets) was financed either by borrowing (liabilities) or by owner investment/retained earnings (equity). The equation must always balance.

🏗️ Balance Sheet Structure

ASSETS                           LIABILITIES & EQUITY
─────────────────────────────────────────────────────────
Current Assets:                  Current Liabilities:
  Cash & equivalents               Accounts payable
  Short-term investments           Accrued expenses
  Accounts receivable              Short-term debt
  Inventory                        Deferred revenue
  Prepaid expenses                 
────────────────               Non-Current Liabilities:
Total Current Assets               Long-term debt
                                   Deferred tax liabilities
Non-Current Assets:                
  PP&E (net of depreciation)    ────────────────
  Goodwill & intangibles        Shareholders' Equity:
  Long-term investments           Common stock
  Other long-term assets          Additional paid-in capital
                                  Retained earnings
                                  Treasury stock (negative)
─────────────────────────────────────────────────────────
TOTAL ASSETS          =        TOTAL LIAB. + EQUITY

🔑 Key Line Items Explained

Assets

Current Assets (convert to cash within 1 year):

Line Item	What It Means
Cash & equivalents	Money in bank + money market instruments
Accounts Receivable (AR)	Money customers owe but haven’t paid yet
Inventory	Goods held for sale
Prepaid expenses	Cash paid for future benefits (insurance, rent)

Non-Current Assets (>1 year):

Line Item	What It Means
PP&E	Property, Plant & Equipment — physical assets, net of accumulated depreciation
Goodwill	Premium paid over fair value in acquisitions — subject to impairment
Intangibles	Patents, trademarks, customer relationships

Liabilities

Current Liabilities (due within 1 year):

Line Item	What It Means
Accounts Payable (AP)	Money owed to suppliers — haven’t paid yet
Accrued expenses	Expenses incurred but not yet billed (salaries, taxes)
Deferred revenue	Cash received, service not yet delivered

Non-Current Liabilities:

Long-term debt: Bonds, term loans maturing beyond 1 year
Deferred tax: Tax owed but not yet payable

Shareholders’ Equity

$Equity = Assets - Liabilities$

Retained earnings = accumulated net income minus dividends paid out
Treasury stock = shares repurchased by the company (reduces equity)

📊 Key Balance Sheet Ratios

Ratio	Formula	Ideal
Current Ratio	Current Assets / Current Liabilities	> 2.0
Quick Ratio	(Cash + AR) / Current Liabilities	> 1.0
Debt-to-Equity	Total Debt / Total Equity	Varies by industry
Debt-to-Assets	Total Debt / Total Assets	< 0.5 is conservative
Return on Assets	Net Income / Total Assets	Higher = better
Asset Turnover	Revenue / Total Assets	Higher = more efficient

🔄 How Balance Sheet Connects to Other Statements

← Income Statement: Net Income flows into Retained Earnings (equity)
← Cash Flow Statement: Net change in cash updates Cash line on balance sheet
→ Working Capital = Current Assets − Current Liabilities (operational liquidity)

⚠️ Balance Sheet Red Flags

Red Flag	What It May Signal
Rising accounts receivable relative to sales	Customers not paying; revenue recognition issues
Goodwill >> total equity	Overpriced acquisitions; future impairment risk
Rising inventory vs. flat sales	Demand problem or obsolescence risk
Current ratio < 1	Short-term liquidity risk
Large off-balance-sheet liabilities	Enron-style hidden debt via operating leases (pre-IFRS 16)

🔗 Connected Concepts

Income Statement — Net income flows into balance sheet retained earnings
Cash Flow Statement — Cash changes linked to balance sheet movements
Financial Statement Analysis — Ratios using all three statements
Working Capital Management — Managing current assets and liabilities
DCF Valuation — Balance sheet needed for enterprise-to-equity bridge

← 📒 Accounting MOC | Related: Income Statement · Cash Flow Statement · Financial Statement Analysis

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Balance Sheet