A Bilanz is one of the most important financial documents a company produces. It provides a snapshot of the financial condition of a company at a given point in time by listing its assets, liabilities and shareholders’ equity.
Assets are everything a company owns that holds inherent, quantifiable value. Liabilities are the financial obligations a company owes to outside parties and can be current or long-term. Investors and lenders look at a company’s balance sheet to gauge its ability to pay back debt, and its overall financial strength.
The basic balance sheet equation is that assets must equal liabilities plus shareholder’s equity. This is a simple concept that is used to create more complex financial statements such as cash flow and profit and loss statements. Financial analysts use balance sheets to calculate ratios such as liquidity, leverage and rate of return.
Creating a balance sheet requires starting with a reporting date and identifying all the assets, liabilities and shareholder’s equity as of that date. Then separating them into two sections, current assets and noncurrent assets, with the most liquid items appearing first.
As an example, cash will be listed as the first item in the current assets section of a balance sheet. Other current assets include accounts receivable and inventory. These are items that a company expects to turn into cash within 12 months or less. The next item in the list would be fixed assets, such as equipment and buildings. This is because these items take longer to liquidate and they decrease in value over time through normal wear and tear, which is recorded as depreciation on the income statement.
In the current liabilities section, you’ll find the amounts of all outstanding bills and obligations due to outside parties. This includes the amount of money owed to suppliers, as well as the current portion of any long-term borrowing (i.e., the most recent interest payment on a 10-year loan). Also included here is the total amount of stockholder’s equity, which is the residual value of shares held by investors after subtracting all outstanding debt and liquidating all other account receivable and inventory.
Because a balance sheet must match on both sides, any changes in either side must be balanced out by the other. For example, if the company pays $10M to its suppliers, it must reduce its accounts payable by an equal amount. Similarly, if the company sells its building to a buyer for $10M, it must increase the amount of its equity by the same amount. This is why it’s so important to check your balance sheets against the previous reporting period and make sure there are no major changes in either the assets or liabilities sections. If there are, that’s likely an indicator of accounting errors such as erroneous entries or a change in currency exchange rates. For more information on preparing and reviewing a balance sheet, please see our article on the topic.