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.
Popular Real Estate Terms
Special court for the purpose of providing fast, inexpensive and informal settlement of small financial claims between plaintiff and defendant. The parties represent themselves. A landlord ...
The term lock-in clause is used in an agreement that prescribes a period of time within which either of the parties that signed a contract cannot terminate the contract. In case one of the ...
The real and personal assets of a person at the date of death. The distribution of the assets to the heirs depends on the provision of the will. If no will exists, the distribution is based ...
Is a stockholder-owned corporation known as Freddie Mac. Freddie Mac purchases investment-quality mortgage from lenders and packages from lenders and packages them as securities which are ...
What is real estate speculation? The term real estate speculation may have a difficult definition, but explaining it may be easier. Think of the stock market, buying stocks when they are ...
Same as term insured loan: A loan indemnified against default by the borrower. Such loans may be a mortgage loan insured by a standard mortgage insurance policy or by FHA mortgage ...
Arrears is a legal and financial term used to describe payments in regards to their due dates. While the term is more often used to refer to a contractual obligation or liability that was ...
The addendum definition is an attachment, clause, or section added to an agreement or contract specifying additional terms, conditions, or requirements to the original agreement or ...
Branch of economics that applies the tools of economic reasoning to the analysis and solution of urban economic problems. ...
Have a question or comment?
We're here to help.