The balance sheet is a financial document used to assess the
health of an organization at a fixed date.
Banks rely on the balance sheet for the purpose of scoring
your loan application.
Investors rely on the balance sheet for the purpose of determining
whether you are a good investment risk.
You rely on the balance sheet because it measures your progress
and efficiency in the running of your business.
Balance sheets reflect the capital structure of the firm. Capital
represents a major resource for all firms. Capital resources need to be acquired
and used at the most efficient rates possible.
No business owner can pay cash for everything. Even GM and Exxon
must borrow or issue stock. Avoiding all debt is foolish and expensive but too
much debt is far to risky. You have to strike an efficient balance for both.
Items on the balance sheet allow you compare how efficiently you
are allocating your capital assets. (see ratios).
Balance sheets are composed of three basic elements: Assets (on
the left side), Liabilities (on the right side) and Owners Equity (also on the
right side)
The balance sheet balances the assets to the liabilities and owner's
equity. By definition the following is true:
