Just like the Income Statement of an entity depicts the profitability of a company as reflected by the economic activities undertaken during the course of the reporting period; the Balance Sheet shows the financial health of the company as on the reporting date. It basically gives the summary of the level of the entity’s assets, liabilities, and the shareowner’s equity at a specific point in time (the ending balances mainly). It gives the details about what the company owns and owes and the worth of the investment of its shareholders.
The basic equation that underlies a balance sheet is:
We can also describe it as:
In this chapter, we would be discussing the elements and formats of the balance sheet. There will be a discussion about each component of the balance sheets such as assets, liabilities, and equity. And since the main aim of an analyst is to draw meaningful inferences from the financial statement, we would also learn about the analysis of the balance sheets.