Definition of "Balance sheet"

Kathy  Levy  real estate agent

Written by

Kathy Levy elite badge icon

KELLER WILLIAMS REALTY

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

Any permanent development that has been made to a parcel of land. Improved land features include whether the land has fruit bearing trees or crops producer by labor, landscaping, or ...

Failure, without sufficient reason, for one or both parties to perform the terms of a real estate contract. Breach requires unequivocal, decisive, and absolute refusal to carry out the ...

Individual who will receive an inheritance upon the death of another. The proceeds of an insurance policy may be in a lump sum annuity. Real estate also passes to the beneficiary. ...

Balcony or low ceiling overhang just above the main floor and between the next story. In a theater, a mezzanine is the first balcony above the stage. ...

Fee payable because of late payment. For example, a mortgagor is assessed a $30 late charge by the bank for not paying the mortgage payment when due. ...

A noncurrent loan in which the principal, interest, or maturity is related to a particular index. Therefore, period adjustments are necessary to conform to the change in the applicable ...

Payments made to enhance the appearance and conditions of real estate property. In so doing, the market value of the property should increase. Examples of renovation costs are siding, ...

The right of a landowner to have lateral land support from adjacent properties. The right of lateral and subjacent support means that an adjacent land owner may not, for example, lower or ...

Interest rate on an adjustable rate mortgage based on the total of the current value of an index and margin applicable to the mortgage. The rate is the basis for the computation of monthly ...

Popular Real Estate Questions