Definition of "Balance sheet"

The term’s balance sheet definition can be described as a financial statement that a company uses to report its liabilities, assets, and shareholders’ equity at a given time. A balance sheet is a baseline allowing a company to evaluate its capital structure. At the same time, it makes it possible for a company to compute its investors’ rate of return

In other words, a balance sheet shows an overall view of what a company owns and owes, but at the same time, it indicates the shareholder’s investments. Balance sheets can also be used to oversee fundamental analysis or to calculate financial ratios for that company.

How do Balance Sheets Work?

While balance sheets provide a snapshot image of the company’s finances at any given time, they do not give any inputs on trends on their own. By looking at a balance sheet, real estate investors can not estimate where the company will be in the future or where it had been in the past from a financial standpoint. However, if you take previous balance sheets and compare them to the most current one a company has, that can give at least an impression of potential upcoming trends. 

Based on ratios derived from balance sheets, investors can understand how a company is dealing financially. Some ratios are the debt-to-equity ratio and acid-test ratio, but the list is long. Income statements, cash statements, or other addenda related to a company’s earnings usually refer back to the balance sheet and can give a more concrete picture of a company’s finances.

The Balance Sheet Formula

Assets = Liabilities + Shareholder’s Equity

The formula is simple and straightforward. A company needs to pay the things it owns through the money it borrows (liabilities) and/or money from investors (shareholder’s equity).

To give an example, if a company takes a loan for five years of $6,000 from a bank, the asset owned by the company increases by $6,000. Similarly, if the company takes the same amount from investors, the company’s assets and shareholder equity will grow by the same amount. The two balance themselves out. Any revenue generated that exceeds its expenses will go into the shareholder’s equity account. The revenues will balance the asset’s side of the formula either as cash, inventory, investments, or other assets.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Real Estate Terms

Having the intellect to comprehend the terms and conditions of a will and their impact. A testator must understand his or her estate and its eventual disposition and effects in order to ...

Thin layer or slate of baked clay, linoleum, or some other material that is used for covering floors, roofs, or as an ornament in a building. ...

The definition of a closed-end lease is what happens when an individual rents or leases an asset at a monthly rate with no obligations for the lessee to purchase the asset that he rents at ...

What is real estate speculation? The term real estate speculation may have a difficult definition, but explaining it may be easier. Think of the stock market, buying stocks when they are ...

Monthly fixed rental payment. ...

(1) Methods that involve discounting the future cash flows generated by an income property. These techniques are used primarily for valuation. (2) Methods of selecting and ranking ...

Federal government agency monitoring and regulating corporate financial reporting and disclosure, use of accounting principles, auditing practices, and trading activities. Its regulations ...

Investment made rationally and intelligently as would be expected by a professional person. A reasonable degree of safety and return are expected. A example is an office building with 99% ...

Offer to buy real estate provided certain conditions are met. ...

Popular Real Estate Questions