A balance sheet is a snapshot of the financial condition of a business, organization, family or individual. Large and small companies, nonprofit organizations and governments have balance sheets. The purpose of the balance sheet is to show the financial condition of the organization or individual at a certain point in time. It does this by listing and totaling up assets and liabilities.
The Plus Side -- Assets
The assets side of a balance sheet lists and totals up everything the organization or individual owns and everything it's due to collect. In a business, for example, assets may include cash, land, machinery, accounts receivable, investments and inventory. For a family, assets typically include cash, investments and the value of a home, autos, furniture and other personal property.
The Minus Side -- Liabilities
The liability or minus side of the balance sheet lists and totals what the organization or individual owes. In a business, this may include rent, payroll obligations, taxes or debts. For a family or individual, liabilities may include student loans, auto loans, debts to family members, credit card balances and a mortgage balance.
Computing Equity and Net Worth
Subtract total liabilities from total assets to find the net worth or equity of an organization or family. The net worth on a company's balance sheet shows how much would be left over if the business sold everything it owned and paid all its bills. In a corporation, this equity or net worth equals the total value of the stockholders' shares.
Net worth is not always a positive value. For example, a family may have assets of $100,000 but owe credit card debt and a mortgage totaling $150,000. To compute the family's net worth, subtract $150,000 from $100,000. The result is minus $50,000, so this family has a negative net worth.
Uses of a Balance Sheet
A balance sheet helps organizations and families track their financial well-being and progress at specific intervals, such as monthly, quarterly or yearly. Because a company's balance sheet shows whether the overall value of the business is increasing, investors often use this information to help them make stock-buying decisions.
A family can use a monthly or yearly balance sheet to track its progress in meeting financial goals, such as getting out of debt or saving for retirement. Lenders ask families and businesses about their assets and liabilities to help determine whether they qualify for loans.
- U.S. Securities and Exchange Commission: Beginners' Guide to Financial Statements
- Money Management International: How to Create a Personal Balance Sheet
- Small Business Adminsitration: Preparing Financial Statements
- Ohio State University: The Balance Sheet -- What Does It Mean?
- Small Business Adminsitration: Business Loan Application Checklist
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