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

Court having the responsibility of performing probate of wills and administering estates. In certain states, a probate court can appoint guardians for minor children of an estate. ...

As a collective noun, land cost means the total cost of purchasing a parcel of land or lot with specific land use and ownership. The land cost includes the purchase price, closing costs, ...

Managing property directly at its location. The management functions may include showing prospective tenants the facilities, collecting rents, and doing upkeep on the property. ...

Waste matter carried off through a series of conduits to a waste disposal facility. ...

U.S. tax law that consists of regulations and rules to be followed by taxpayers. The Internal Revenue Code of 1954 is continually revised and amended over time. ...

Something that is inferred, but not explicitly stated. The inference may be deducted from the relevant information. ...

Laws enacted by every state governing the activities and requirements of real estate salespeople and brokers. Upon satisfying the necessary age and residency requirements and satisfactorily ...

The return by owners of a property investment usually through a depreciation allowance. a clause in a contract permitting the prior owner of real estate to recover under certain ...

Long, wide piece of lumber having a minimum width of 8 inches with a minimum thickness of 1 inch for hardwood and 2 to 4 inches for softwood. ...

Popular Real Estate Questions