Updated on March 11, 2023
Balance sheets reveal the financial position of a company and all its assets and liabilities on a particular date, usually the last date of the financial year. The three main components of balance sheets are
Shareholder’s funds – Shareholders’ funds include share capital (Equity share capital and preference share capital) as well as reserves and surplus.
Liabilities – This includes long-term borrowings like debentures, bonds, secured loans, etc., and short-term borrowings like current liabilities (creditors, accounts payables, etc.)
Assets – This component includes fixed assets which are long-term assets like plant and machinery, land and building, long-term investments in other companies or subsidiaries, etc. and short-term assets like current assets and advances
Utility of balance sheets
Balance sheets are used to calculate key financial ratios that indicate the liquidity position and working capital position (current ratio/ quick ratio), leverage position of the company (debt-equity ratio), the efficiency of resources (asset turnover ratio), and other key ratios like ROE (Return on Equity), ROA (Return on Assets), etc. to ascertain the financial health of a company