In the earlier blog, we looked at the way each of the different Financial Statements could be used for analysis and understanding the company. We now begin at looking at each of these in detail - the first set of discussion would be regarding Balance Sheet.
As the name suggest, a Balance Sheet indicates a balance. It derives from the famous principle in mathematics that in an equation the Left hand Side would match the Right hand Side. So what Balance does Balance Sheet really talk about? If so what is the equation.
For business when ever any investment is made, it would be used to buy in assets etc. So, we have:
Inputs into the business = assets that the company would invest in
The inputs into the business would be what the owners would invest in it + any borrowing to buy up the assets = assets
Thus we have the equation as:
Assets = shareholder's equity + Liability.
This means that assets, or the means used to operate the company, are balanced by a company's financial obligations along with the equity investment brought into the company and its retained earnings.
When represented as it could possibly be presented as shown in the figure.
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