A balance sheet is a financial report that shows a company's assets, liabilities and investors' equity at a specific particular in time, and gives a premise for calculating rates of return and assessing its capital structure. It is a fiscal report that gives a depiction of what and how much a company owes and owns, and the amount invested by investors.
It is utilized along with other significant fiscal statements such as the income statement and statement of cash flows in order to compute financial ratios or conduct fundamental analysis .
The balance sheet sticks to the following equation, where assets on one side, and liabilities plus shareholders' equity on the other side, find a balance:
Assets = Liabilities + Shareholders’ Equity
This equation is instinctive: a company needs to pay for all the things it owns (resources) by either taking a loan (liabilities) or taking it from investors (issuing shares).
For instance, if a company takes out a five-year, Rs. 8,00,000 advance from a bank, its resources (assets) will increment by Rs. 8,00,000. Its liabilities will likewise increment by Rs. 8,00,000, balancing both sides of the equation.
If the company takes Rs. 16,00,000 from shareholders, its resources will increment by that sum, as will its shareholders' equity. All revenues the company produces in abundance of its liabilities will go into the shareholders' equity account, representing the net resources held by the proprietors. These revenues will have to be balanced on the assets side, reflecting as cash, investments, inventory, etc.