The Balance Sheet: Assets, Liabilities and Equity

What the balance sheet shows

The balance sheet (in IFRS terminology, the statement of financial position) is a snapshot of the resources a company controls and the sources used to finance them, at a specific date — usually the end of the financial year. Unlike the income statement, which covers a period, the balance sheet captures a single moment.

For an investor, the balance sheet answers three questions: what the company owns, how much it owes and when, and how much is left for shareholders in accounting terms. Public-interest issuers generally report under international standards (IFRS), which makes balance sheet structures comparable across companies.

The structure of assets and funding sources

Items are classified by time horizon: current (realizable or due within 12 months or one operating cycle) and non-current (long-term).

• Fixed (non-current) assets: land, buildings, equipment, intangible assets, long-term financial investments.
• Current assets: inventories, trade receivables, other receivables, cash and cash equivalents.
• Long-term liabilities: bank loans and bonds maturing in more than one year, long-term provisions.
• Current liabilities: trade payables to suppliers, the current portion of loans, taxes and wages payable.
• Equity: share capital, reserves, retained earnings.

Balance sheet figures are largely accounting values: many assets are carried at historical cost less depreciation, so book value can differ substantially from market value. Internally developed brands or know-how often do not appear on the balance sheet at all.

Liquidity and working capital

Liquidity describes a company's ability to meet its short-term obligations. A profitable issuer can still run into trouble if its current assets do not cover its current liabilities when they fall due.

Interpretation: a current ratio of 1.5 looks comfortable, but a quick ratio below 1 shows that coverage depends on selling inventories. For an agricultural company with seasonal production this may be normal; for a services company it could be a warning sign.

Common pitfalls when reading a balance sheet

• Comparing ratios across sectors with different operating cycles.
• Ignoring asset quality: old receivables may be hard to collect, and inventories may be impaired.
• Analyzing a single balance sheet, without the multi-year trend and without the notes.
• Assuming that the book value of equity equals the true value of the business.