What is a balance sheet?

A balance sheet is a financial report that summarizes assets, equity, and liabilities at a given time. It shows what assets are in the company and how those assets are financed. It also shows how large the company's debt is to the shareholders, i.e. how large the equity is.

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The balance sheet, together with the income statement, the management report and the auditor's report, is part of the annual accounts and is thus a central part of the company's accounting. From the balance sheet, many important economic conclusions can be drawn. As an entrepreneur, having the ability to understand and be able to analyze it effectively becomes an important key to being able to develop their business with greater success.

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What does the balance sheet contain?

The balance sheet consists of assets, liabilities and equity, which are divided into two main sections: the debit side and the credit side.

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Sample balance sheet

If we take a simple example, a balance sheet may look as follows in its simplest form. Initially, the company has 10,000 SEK in the treasury as its only asset and does not hold any debts. After that, the company chooses to borrow an additional SEK 10,000, which changes the balance sheet.

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Assets (debit side)

Assets contain a specification of all assets of the enterprise, divided into fixed assets and current assets.

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Non-current assets

Fixed assets are assets that are estimated to be used in the company for a period longer than one year. They can be intangible assets, such as goodwill and patents, tangible assets, such as buildings and machinery, or financial assets such as securities and stocks.

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Current assets

Current assets are assets that are intended to be traded within one year, such as inventories, accounts receivable, cash and cash equivalents and short-term investments.

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Equity and liabilities (credit side)

Equity and liabilities show how assets have been financed, divided between equity and liabilities.

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Equity

Equity represents the debt of the company to its owners and is defined as the difference between the assets and liabilities of the company. It reflects the financial strength of the company and is divided into tied equity, like share capital and reserve fund, and free equity, like earnings for the year and retained earnings.

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Debt

The liabilities are broken down as long-term liabilities and short-term liabilities. Long-term debt refers to debts that mature after more than one year, such as bank loans. Short-term liabilities refer to liabilities that mature within one year, such as accounts payable.

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Basic principle of the balance sheet

The balance sheet is named after its basic principle in which the debit and credit side should balance. This means that the value of assets should be equal to the total value of equity and liabilities, also known as balance sheet total.

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Balance Sheet and Income Statement

The balance sheet is supplemented by the income statement, which shows the company's performance over a period. Together, these reports provide a complete picture of the financial status and development of the company.

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Summary

The understanding and proper use of the balance sheet is critical to the financial success of the company. By revealing the exact financial position at a specific time, it provides business leaders with the insights necessary to effectively navigate the company toward long-term success and stability.