What is the difference between a balance sheet and an income statement?

The balance sheet shows the position on one date (what the company has and owes). The income statement shows sales, costs and profit over a period.

Why do assets always equal liabilities plus equity?

Because every asset was funded either by borrowing or by shareholders' money. Equity is defined as exactly the difference between assets and liabilities.

Analysis

What is Balance sheet?

Balans

In short

A snapshot on one date: what the company owns (assets), what it owes (liabilities) and what belongs to shareholders (equity). Assets = liabilities + equity.

The balance sheet is a snapshot of a company on one date: what it owns (assets), what it owes (liabilities) and what belongs to shareholders (equity). The core equation always holds:

Assets = Liabilities + Equity

What it contains

Assets: current (cash, receivables, inventory) and long-term (plants, equipment, intangible assets, goodwill).
Liabilities: current (due within a year) and long-term (for example bond debt).
Equity (book value) — what is left after all liabilities are subtracted from assets.

What it tells you

The balance sheet shows financial stability: can the company cover near-term bills (current ratio), how much does it rely on debt (debt-to-equity), how much cash does it hold. Ratios such as P/B and ROE are also calculated from balance sheet numbers.

Limitations

Assets are often recorded at historical (purchase) cost, not market value. Valuable things like brands, software and talent barely appear on it. A single date can also mislead — comparing several quarters in a row is better.

Nur Tech balance sheet: who funds the $180m of assets

Shareholders' equity $100mCurrent liabilities $40mOther long-term $30mInterest-bearing debt $10m

Assets = liabilities + equity: $180m = $80m + $100m. Most assets are funded by shareholders; interest-bearing debt is only $10m.

Example

A hypothetical company's balance sheet ($ millions):

Assets — 500

Cash 80, receivables 70, inventory 50 → current assets 200
Plant and equipment 300

Liabilities — 300

Current liabilities 120
Long-term debt 180

Equity — 200

Check: 300 + 200 = 500 ✓

Current ratio: 200 ÷ 120 = 1.67
Debt-to-equity (assuming no interest-bearing debt in current liabilities): 180 ÷ 200 = 0.9
With 50 million shares, book value per share: 200 ÷ 50 = $4

Mistakes and tips

Look at cash and debt together: large debt may be offset by a large cash pile.
Be careful when goodwill is a big part of assets — it comes from expensive acquisitions and can be written down.
Negative equity is not always a sign of distress: at some companies it results from heavy buybacks. But find out why.

Frequently asked questions

What is the difference between a balance sheet and an income statement?: The balance sheet shows the position on one date (what the company has and owes). The income statement shows sales, costs and profit over a period.
Why do assets always equal liabilities plus equity?: Because every asset was funded either by borrowing or by shareholders' money. Equity is defined as exactly the difference between assets and liabilities.

Learn it in the Academy

This term is covered with hands-on examples and a quiz in these lessons of the interactive course.

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