The balance sheet is one of the most important statements in a company's accounts. It shows what assets and liabilities a company has, and how the business is funded (by shareholders and by debt: the financial structure of the company). Book values are usually historical cost or fair value.
The balance sheet provides information that is useful when assessing the financial stability of a company. A number of financial ratios use numbers from the balance sheet including gearing, the current assets ratio and the quick assets ratio. However, ratios based on profits and cash flow are at least as important for assessing financial stability: the most important of these are interest cover and cash interest cover.
If any assets or (more commonly) liabilities that belong to the company in their economic effect do not appear on the balance sheet because accounting standards do not require it, they are referred to as off-balance sheet.
A balance sheet is usually presented in two sections that must reach to same total — this requirement that the two sections balance is the reason it is called a balance sheet.
The typical format of a balance sheet is:
- Fixed assets/Non-current assets
- Current assets
- Total Assets
- Total Liabilities
- Net assets (total assets less total liabilities)
And in the second section:
- Other reserves (such as the revaluation reserve)
- Retained earnings
- Total shareholder's equity
- Minority interests (only in consolidated accounts)
- Total equity
There are a number of common variations on this. The most common moves liabilities from the first section to the second. In this case the two “sides” of the balance sheet show the assets on the first side and the way they are funded on the second.
Another common variant is showing current liabilities as a deduction from current assets.