Balance Sheet

In This Article

• The balance sheet is a financial statement that provides a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
• The fundamental accounting equation—Assets = Liabilities + Shareholders’ Equity—underpins the balance sheet and the interconnections among each line item.
• The assets section is listed in descending liquidity and separated into current assets and non-current assets.
• The liabilities section is listed in order of how close their due dates are and split between current liabilities (<12 months) and non-current liabilities (>12 months).
• The shareholders’ equity section represents the residual value—or “net worth”—remaining upon deducting total liabilities from the total assets of a company.
• The balance sheet offers practical insights into a company’s current financial position and is used to perform ratio analysis to measure operating efficiency, liquidity, solvency, and leverage risk.

Balance Sheet Template: Standard Format

The balance sheet reflects the carrying values of a company’s assets, liabilities, and shareholders’ equity at a specific point in time.

Conceptually, a company’s assets refer to the resources belonging to the company with positive economic value, which must have been funded somehow.

The two funding sources available for companies are liabilities and shareholders’ equity, which reflect how the resources were purchased.

In simple terms, the balance sheet—also known as the “statement of financial position”—provides a comprehensive overview of a company’s assets (“what is owned”) and liabilities (“what is owed”) in a given period.

The difference between a company’s total assets and total liabilities results in shareholders’ equity (or “net assets”).

The standard format and three components of the balance sheet are each described in the following illustrative chart:

Balance Sheet Formula

The fundamental accounting equation states that a company’s assets must be equal to the sum of its liabilities and shareholders’ equity.

If the fundamental accounting equation is not true in a financial model—i.e. the balance sheet does not “balance”—the financial model contains an error in all likelihood.

The three components of the equation will now be described in further detail in the following sections.

Once complete, we’ll undergo an interactive training exercise in Excel, where we’ll practice building a balance sheet template using the historical data pulled from the 10-K filing of Apple (AAPL).

How to Prepare the Balance Sheet for Beginners

1. Assets Section (Current vs. Non-Current)

Assets describe resources with economic value that can be sold for money or have the potential to provide monetary benefits someday in the future.

The assets section is ordered in terms of liquidity, i.e. line items are ranked by how quickly the asset can be liquidated and turned into cash on hand.

On the balance sheet, a company’s assets are separated into two distinct sections:

1. Current Assets ➝ The short-term assets that can or are expected to be converted into cash within one year (<12 months)
2. Non-Current Assets ➝ The long-term assets expected to provide economic benefits to the company in excess of one year (>12 months).

While current assets can be converted into cash within a year, liquidating non-current assets, such as fixed assets (PP&E), can be a time-consuming process.

Furthermore, a substantial discount is normally necessary to find a suitable buyer to sell the fixed asset in the open markets.

The most common current assets are defined in the table below.

The next section consists of non-current assets, which are described in the table below.

2. Liabilities Section (Current vs. Non-Current)

Similar to the order in which assets are displayed, liabilities are listed in terms of how near-term the cash outflow date is, i.e. the near-term liabilities coming due on an earlier date are listed at the top.

Liabilities are also separated into two parts on the basis of their maturity date:

• Current Liabilities ➝ Short-term liabilities are expected to be paid off within one year (e.g. accounts payable)
• Non-Current Liabilities ➝ Long-term liabilities are not likely to come due for at least one year (e.g. long-term debt).

The most frequent current liabilities that appear on the balance sheet are the following:

The most common non-current liabilities include:

3. Shareholders Equity Section

The second source of funding—other than liabilities—is shareholders equity (or “stockholders equity”), which consists of the following line items.

Sample Balance Sheet Template: Apple (AAPL)

The balance sheet of Apple (AAPL), a global consumer electronics and software company, for the fiscal year ending 2021 is shown below.

^{Sample Apple Balance Sheet Template (Source: AAPL 10-K)}

How to Analyze the Balance Sheet

While the financial statements are closely intertwined and necessary to understand a company’s financial health, the balance sheet is particularly useful for ratio analysis.

The following chart contains some of the most common metrics used in practice to analyze a company’s balance sheet.

How are the Financial Statements Linked?

The three core financial statements—income statement, balance sheet, and cash flow statement—are intricately connected and collectively present a comprehensive view of a company’s current financial condition.

• Income Statement ➝ The income statement, often used interchangeably with the term “profit and loss statement (P&L)”, records the revenue, costs, expenses, and net income (the “bottom line”) for a specified period. The net income, or accounting profitability, flows in as the starting line item on the cash flow statement (CFS).
• Cash Flow Statement ➝ The cash flow statement is composed of three sections—the cash from operating, investing, and financing activities—with each section reconciling the company’s reported net income to track the actual movement of cash in the stated period (i.e. the “inflow” and “outflow” of cash).
• Balance Sheet ➝ The balance sheet, or statement of financial position, presents a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time. The cash flow statement captures the changes in working capital line items to ensure the reflected cash balance is the actual cash balance available at the end of the given period.

The retained earnings line item is the centerpiece that ties the three financial statements together.

Conceptually, retained earnings reflect the cumulative earnings kept by a company since its inception rather than distributing excess funds in the form of shareholder dividends.

The ending retained earnings balance recognized on the balance sheet equals the beginning balance plus net income, net of any dividend issuances to shareholders.

The ending cash balance on the cash flow statement (CFS) must match the cash balance recognized on the balance sheet for the current period.

Balance Sheet Calculator — Excel Template

We’ll now move on to a modeling exercise, which you can access by filling out the form below.

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1. Basic Balance Sheet Template Build

Suppose we’re tasked with building a 3-statement model for Apple (NASDAQ: AAPL) and are currently preparing the company’s historical balance sheet data.

Using the screenshot from earlier, we’ll enter Apple’s historical balance sheet into Excel.

The hard-coded inputs are entered in blue font, while the calculations (i.e. the ending total for each section) are in black font.

Why? The color formatting abides by general financial modeling best practices, which make building a financial model easier for the one creating the model and for purposes of auditing.

However, rather than copying every data point in the same format as reported by Apple in its public filings, we must make discretionary adjustments that we deem appropriate for modeling purposes.

• Marketable Securities ➝ For instance, marketable securities are consolidated into the cash and cash equivalents line item because the underlying drivers are identical.
• Short-Term Debt ➝ The short-term portion of Apple’s long-term debt is consolidated into one combined line item since the mechanics of the debt schedule roll-forward are the same.

However, that does not mean all remotely similar line items should be combined, as seen in the case of Apple’s commercial paper.

Commercial paper is a form of short-term debt with a specific purpose, different from long-term debt. Since commercial paper is a debt-like security, certain financial models consolidate commercial paper with the revolving credit facility (“revolver”) line item.

2. Balance Sheet Calculation Example

Once Apple’s historical data is input in our Excel template, with the proper adjustments to streamline our financial model, we’ll calculate the profit metrics denoted in black font as a standard modeling convention (and “best practice”).

• Blue Font ➝ Hardcoded Input
• Black Font ➝ Calculation (or Cell Reference)

The formula for each bolded cell is as follows:

• Total Current Assets = Cash and Cash Equivalents + Accounts Receivable, net + Inventories + Other Current Assets
• Total Assets = Total Current Assets + Property, Plant and Equipment, net + Other Non-Current Assets
• Total Current Liabilities = Accounts Payable + Other Current Liabilities + Commercial Paper + Deferred Revenue
• Total Liabilities = Total Current Liabilities + Long-Term Debt + Other Non-Current Liabilities
• Total Shareholders’ Equity = Common Stock and APIC + Retained Earnings + Other Comprehensive Income / (Loss)

Note that in our basic balance sheet template, the “Total Assets” and “Total Liabilities” line items include the values of the “Total Current Assets” and “Total Current Liabilities”, respectively.

In other cases, the balance sheet presentation will be divided into two parts: “Current” and “Non-Current.”

Upon completion, the final step is to ensure the fundamental accounting equation remains true by subtracting total assets from the sum of the total liabilities and shareholders’ equity, which comes out to zero, confirming our balance sheet is indeed “balanced.”