A corporate balance sheet is sometimes called a ‘statement
of financial position’. Position at a certain point in time (typically on year
end – on December 31st). Which for most companies is the end of their
financial year. Thus, the balance sheet is the only financial statement which
applies to a single point in time – rather than to a period - of a business'
calendar year.
A standard company balance sheet has three parts: assets, liabilities and capital.
The main categories of assets are usually listed first, and typically in order
of liquidity. Assets are followed by the liabilities.
The difference between the assets and the liabilities is
known as equity or the net assets or the net worth or capital of
the company and according to the accounting equation, net worth must equal
assets minus liabilities. Capital section follows the liabilities section.
Another way to look at your balance sheet is to put your
asset on the left side and your liabilities and capital on the right side. According
to the accounting equation, the total
of your assets must be equal to the sum of your total liabilities and your
total capital.
Assets = Liabilities + Shareholders'
Equity
In other words, the two sides of your balance sheet ‘balance
out’. This makes sense: a company has to pay for all the things it has (assets)
by either borrowing money (liabilities) or getting it from shareholders
(shareholders' equity).
The initial idea of the balance sheet was to calculate the
true and fair value of shareholders’ equity. And, therefore, of a business
entity. In reality, balance sheet contains only the book value of owners’
equity which has nothing to do with its real, intrinsic value.
Attempts to modify the structure of corporate balance sheet
to arrive at the true shareholders’ value were unsuccessful; therefore, you
will need a financial valuation model to do it.
However – as I will show in the next sections (on balance
sheet KPI), corporate balance sheet is still a very useful and valuable tool
for measuring and maximizing corporate performance.
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