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

Municipal ordinance stating the distance from a curb or property line where the building of a structure is prohibited. Also states the distances from a boundary line where construction is ...

Monies paid to use property, such as the use of natural resource extractions. The royalty payment is typically based upon some percentage of the income or fee for substances generated from ...

A group of investment bankers underwriting and distributing a new or outstanding issue of securities of a real estate business. a professionally managed limited partnership investing in ...

Unlimited interest in property. A freehold estate may be a fee simple or file estate. Freehold estate includes freehold in deed, a fee simple estate; freehold in law, an inheritable estate; ...

A real estate professional’s job is to represent their seller’s or buyer’s best interest in a real estate transaction through an agency relationship. This means that the ...

The definition of a census-designated place or CDP is rather complex and difficult to understand. We are going to try to explain it as much as possible. Starting from the top and working ...

Style of architecture originating at the German Bauhaus, or architectural institute, in the 1920's associated with the International School of architecture. The Bauhaus style emphasized ...

A window in a roof or ceiling of a structure from which light enters the house. ...

Tendency to go to the party or situation of the lowest level of opposition. ...

Popular Real Estate Questions