What is the Balance Sheet?
The Balance Sheet, one of the core financial statements, provides a snapshot of a company’s assets, liabilities and shareholders’ equity at a specific point in time.
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Balance Sheet Formula
The balance sheet shows the carrying values of a company’s assets, liabilities, and shareholders’ equity sections at a specific given time.
Hence, the balance sheet is often used interchangeably with the term “statement of financial position”.
The fundamental accounting equation states that at all times, a company’s assets must be equal to the sum of its liabilities and shareholders’ equity.
Fundamental Accounting Equation
- Assets = Liabilities + Shareholders’ Equity
The assets of a company (i.e. the resources belonging to the company) must’ve been funded somehow, and the two funding sources available for companies are liabilities and equity (i.e. how the resources were purchased).
- Assets → The resource with positive economic value that can either be sold for money if liquidated or be used to generate future monetary benefits. For example, cash and short-term investments are a store of monetary value and can earn interest, accounts receivable are payments owed by customers that had paid on credit, and fixed assets (PP&E) are purchased via capital expenditures because these long-term assets have the potential to generate positive cash flows in the future.
- Liabilities → The unsettled obligations to third parties that represent future cash outflows — or more specifically, the “external” source of financing available to a company to fund the purchase and maintenance of assets. Unlike assets, liabilities are unsettled obligations to another party in the future and represent a future cash outflow to third parties, such as lenders that provided debt financing and the unmet payments still owed to suppliers/vendors.
- Shareholders’ Equity → The difference between a company’s assets and liabilities and represents the remaining value if all assets were liquidated and outstanding debt obligations were settled. Equity represents the capital invested into the company and is the “internal” source of capital, which helps fund the purchase of assets and day-to-day operations — with the providers of capital ranging from the founders (i.e. boot-strapped) and outside institutional investors. In addition, retained earnings line items are the accumulated net profits kept by a company since inception, as opposed to issuing common or preferred dividends to shareholders.
Balance Sheet — Assets Section Line Items
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. ranked by 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 parts:
- Current Assets → The assets that can or are expected to be converted into cash within one year.
- Non-Current Assets → The long-term assets that are expected to provide economic benefits to the company in excess of one year.
While current assets can be converted into cash within a year, attempting to liquidate non-current assets (PP&E) can be a time-consuming process where substantial discounts are often necessary to find a suitable buyer in the market.
The most common current assets are defined in the table below.
|Cash and Cash Equivalents||
|Accounts Receivable (A/R)||
The next section consists of non-current assets, which are described in the table below.
|Property, Plant and Equipment (PP&E)||
Balance Sheet — Liabilities Section Line Items
Similar to the order in which assets are displayed, the liabilities are listed in terms of how near the cash outflow date is, i.e. liabilities coming due sooner are listed at the top.
Liabilities are also separated into two parts on the basis of their maturity date:
- Current Liabilities → The liabilities that are expected to be paid within one year.
- Non-Current Liabilities → The long-term liabilities that are not expected to be paid for at least one year.
The most frequent current liabilities that appear on the balance sheet are the following:
|Accounts Payable (A/P)||
Next up, we have the most common non-current liabilities shown here:
The second source of funding, other than liabilities, is shareholders’ equity, which consists of the following line items.
|Additional Paid-In Capital (APIC)||
|Retained Earnings (or Accumulated Deficit)||
|Other Comprehensive Income (OCI)||
Apple Inc. (AAPL) Balance Sheet Example
The screenshot below is of the balance sheet of Apple (AAPL) for the fiscal year ending 2021.
Balance Sheet Example — Excel Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Balance Sheet Example Calculation
Suppose we’re building a 3-statement model for Apple (NASDAQ: AAPL) and are currently at the step of entering the company’s historical balance sheet data.
Using the screenshot from earlier, we’ll enter Apple’s historical balance sheet into Excel.
To abide by the general financial modeling best practices, the hardcoded inputs are entered in blue font, while the calculations (i.e. the ending total for each section) are in black font.
But rather than copying every single data point in the same format reported by Apple in their public filings, discretionary adjustments that we deem appropriate must be made for modeling purposes.
For instance, marketable securities are consolidated into the cash and cash equivalents line item because the underlying drivers are identical.
The short-term portion of Apple’s long-term debt was also consolidated as one line item since the debt schedule roll-forward is the same.
However, that does not mean that all similar 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 that is different from long-term debt. In fact, the 3-statement model of Apple we build in our Financial Statement Modeling (FSM) course treats the commercial paper more like a revolving credit facility (i.e. “revolver”).
Once all the historical data of Apple is entered with the proper adjustments to make our financial model more intuitive, we must ensure the fundamental accounting equation holds true by subtracting total assets from the sum of the total liabilities and shareholders’ equity, which comes out to zero and confirms our balance sheet is indeed “balanced”.