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What is a Balance Sheet?
The balance sheet is a financial statement that describes what the firm is worth at any one point in time. A typical company balance sheet consists of the three sections; assets, liabilities and owner’s equity or capital.
Often described as a “snapshot of a company’s financial condition”, it is the only financial statement which applies to a single point in time. It is crucial that all potential investors know how to read, use, and analyze this document. The accounts of the balance sheet do not show results, but net values.
How the balance sheet ‘balances’
This report is based on the most basic accounting principle that net worth (owner’s equity) must equal assets minus liabilities.
The statement is divided into two parts, 1) assets and 2) Liabilities & owner’s equity.
The two sides of the balance sheet must equal, which makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholder’s (owner’s equity).
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