A balance sheet is a financial statement used in accounting to summarise the assets, liabilities and the shareholder equity of a company at a given time. Balance sheets are commonly produced at least once a year for accounting and taxation purposes.
The assets of a company include everything the company “owns”, the liabilities include everything the company owes to other companies (e.g. suppliers) and the shareholder equity includes the investments by shareholders into the company.
The assets of a company have to equal the sum of the company’s liabilities and the shareholders’ equity.
Business resources: How can I calculate the working capital of my company?
The working capital of a company is a crucial financial ratio to determine whether a company is able to pay for current and upcoming liabilities such as bill payments, rent payments and salaries.
If the company’s assets are equal to the company’s liabilities, the company’s working capital is 0 and therefore the company will not be able to pay its bills. The greater the company’s working capital the easier and more likely the company will be able to pay its bills.
The working capital can be calculated by subtracting the current liabilities from the current assets.
The calculation is: Working Capital = Current Assets – Current Liabilities