Learn: Balance Sheet - Purpose and Layout

Welcome!You've already learned about budget variances and how they help analyse financial outcomes. Now, let's build on that by exploring the Balance Sheet—a key financial statement used by businesses.

What is a Balance Sheet?A Balance Sheet is a financial statement showing a company's assets, liabilities, and equity at a specific point in time. It helps stakeholders understand the financial position of the business and whether it is financially stable.

Why is the Balance Sheet Important?The Balance Sheet is essential for assessing the value of a business and measuring its liquidity (ability to meet short-term obligations). It is used by investors, lenders, and managers to make informed decisions.

Key Components of a Balance SheetA typical Balance Sheet is divided into three sections: Assets, Liabilities, and Equity. These components must balance, hence the name.

AssetsAssets are resources owned by the business that have economic value, such as cash, inventory, and property. They are further divided into current assets (e.g., cash, accounts receivable) and non-current assets (e.g., buildings, machinery).

LiabilitiesLiabilities are obligations the business owes to others, such as loans or accounts payable. Like assets, liabilities are divided into current liabilities (due within one year) and non-current liabilities (due after one year).

EquityEquity represents the owners' residual interest in the business after liabilities are deducted from assets. It includes retained earnings and capital contributed by shareholders.

The Layout of a Balance SheetThe Balance Sheet is structured with assets listed on one side and liabilities and equity on the other. The two sides must always balance as per the accounting equation: Assets = Liabilities + Equity.

Review Time!Well done! You've learned about the purpose and layout of a Balance Sheet, including its components. Let’s review the key concepts with some questions.