The Balance Sheet is one of the oldest financial statements, but it's still one of the most important. It shows a company's current financial position at a single point in time, enabling shareholders and other stakeholders to assess the company's overall health. This guide will take you through the balance sheet and explain each line item, including the balance sheet equation.Balance sheet componentsThe balance sheet is a snapshot of a company's financial position at one point in time, showing the current assets and liabilities. The two sides of the balance sheet are divided into three categories:Current assets:-These include cash, inventory, accounts receivable, and other assets that can be converted to cash in one year or less. Long-term assets. These are assets with a useful life of more than one year, such as property, plant and equipment (PP&E), and intangible assets like patents and trademarks.Current liabilities:-These are liabilities that come due within a year, including accounts payable, accrued expenses payable, current portion of long-term debt, and any short-term borrowings. Long-term liabilities. These are obligations with a maturity longer than one year, such as long-term debt, pension and other post-employment benefits (OPEB) obligations, deferred taxes and any other long-term liabilities.The two sides of the balance sheet must equal each other.Assets = Liabilities + Shareholders’ equityIn this equation, shareholders’ equity is simply the difference between total assets and total liabilities.Total assets are the sum of current and long-term assets, which means that shareholders’ equity is simply the difference between the current and long-term asset totals. This figure, in turn, is composed of two parts: one part that is permanent in nature (retained earnings) and one part that can be converted to cash in a year or less (accumulated other comprehensive income). In this way, retained earnings and accumulated other comprehensive income can be viewed as a form of “short-term” capital.
