What is the Purpose of a Balance Sheet?

What You’ll Find on a Balance Sheet

Within this financial statement there are two main sections. The first section is intended to outline all of your assets. In most cases, the assets that are the most liquid like cash and cash equivalents will be placed at the very top and less liquid assets such as property will be at the bottom. There will be a “Total Assets” calculation as well to sum everything up. 

The second section will include liabilities and equity. If you owe money on loans and credit cards, for example, they will be included here. All of your liabilities will then be added up in a “Total Liabilities” calculation. Following the liabilities will be your equity section, which is the difference between your assets and your liabilities. If this number is positive, it means you have “equity” in the business… aka, if you sold the business today, you (and/or your investors) would be able to walk away with some cash. 

How to Use a Balance Sheet

Unlike an income statement, a balance sheet will not show how much money you made or lost. Instead, it’ll give you a quick glimpse of your business health at a specific moment in time. You can’t count on it to understand how you’ve changed over the long term, like you’d be able to with a financial statement or income statement.

What you can do, however, is compare your latest balance sheet to previous ones. This way you can get an idea of how your finances have improved or worsened and how far you’ve performed since you started your business.

In addition, investors may use it to evaluate your short term financial health. Depending on what it looks like, it may convince them to invest in your business or turn to a competitor instead.