What Is a Balance Sheet?

A balance sheet is an essential financial statement used to determine a company’s assets, liabilities, and equity over a specific period. Also referred to as the statement of financial position, a balance sheet is what a company uses to disclose what it owns and what it owes—represented by a single, fundamental equation:

Assets = Liabilities + Equity

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The 3 Main Elements of a Balance Sheet

As the name suggests, a balance sheet must always balance to reflect a company’s financial position accurately. A balance sheet’s three core elements are broadly defined as the following:


Assets are all items of value held by a company. A balance sheet organizes assets in order of their liquidity—how quickly and easily a company can convert the assets into cash.

Assets include short-term and long-term values (also called current and non-current), indicating whether a company means to liquidate them within a specified period or hold them longer.

Assets commonly include a combination of the following:

  • Cash equivalents, such as treasury bills and certificates of deposit
  • Accounts receivable (AR)—money owed by a company’s customers
  • Inventory
  • Fixed assets like land, physical structures, and equipment
  • Intangible assets like intellectual property (IP) and patents


Liabilities are debts owed by a company in the recorded period. As with assets, a balance sheet classifies liabilities as short-term and long-term. In this case, the term of a liability specifies whether a company means to pay a debt within the given year. Common liabilities owed by companies include:

  • Accounts payable
  • Wages payable
  • Federal and state taxes payable
  • Loans


Equity is often referred to as owner’s equity or shareholder’s equity and is the total value of a company’s assets after deducting the company’s total liabilities.

What Is a Clean Balance Sheet?

A clean balance sheet is error-free, providing a financial record for a set period that is:

  • Accurate
  • Consistent
  • Up-to-date
  • Formatted correctly
  • Uncluttered

What Is the Purpose of a Balance Sheet?

A balance sheet assesses a business’s health, meaning whether a company is sufficiently liquid or substantially in debt. In this critical role, a balance sheet evaluates how a company operates, whether it’s on a positive trajectory with profits and spending or must make changes for its well-being.

The benefits of transparency and insight help further illustrate what a balance sheet is. For a business to secure capital, a balance sheet can provide a record of its creditworthiness to a bank and other lenders. Investors can view a balance sheet to determine an expected rate of return, while potential investors can use it to assess risk levels when considering an investment.

Financial Ratios

One can use a balance sheet to formulate several commonly-used ratios when evaluating a company’s finances. Three of the most widely used financial ratios are:

Liquidity Ratios

This ratio determines the capability of a business to convert assets into readily available cash.

Solvency Ratios

A solvency ratio helps assess a company’s ability to pay off its debts.

Profitability Ratios

This ratio helps to evaluate a business’s ability to generate income.

Balance Sheet Key Takeaways

A balance sheet must do the following:

  • Provide a clear picture of a company’s finances
  • Always balance assets, liabilities, and equity perfectly
  • Measure financial performance, responsibility, and creditworthiness within a set period