|The balance sheet, also called the statement of financial position, summarizes the company’s resources and claims to those resources at a certain point in time.|
In this way, the balance sheet is similar to taking a snapshot of the business, where the flow of revenue and expenses reported on the income statement is momentarily halted and tallied in the permanent accounts. From this snapshot we can glean valuable accounting information about a company’s profitability, liquidity, and financial strength.
The balance sheet balances the assets on one side with interests or claims to those interests on the other. This relationship between assets, on one side, and liabilities and owner’s equity on the other, is most clearly expressed in the accounting equation:
The Accounting Equation
|Assets = Liabilities + Owner’s Equity|
Though double entry accounting and each of the financial statements are centered on this accounting equation, the balance sheet most clearly represents it.
A claim to an asset can be either a debt, called a liability, or what is owned by the business, called owner’s equity. Owner’s equity is the sum of what the owner has invested in the business, and the profits (or losses) accumulated from business operations.