Balance sheet is a term that refers to an inventory of business assets in monetary terms, in view of its form and resources of funding at a certain time interval. At some point, they are immediate status indicators.
The economic success of the business depends, in addition to the technical maturity but also on the business capabilities of the managers. An important part of the business capabilities is to maintain property-financial stability. Under the term of property and financial stability we understand the company’s ability to create and permanently maintain the proper relationship between property (assets) and used capital (liabilities). The balance between property and financial structure of the company describes the balance sheet. A company’s balance sheet is a written summary of the property and its resources to a specific date. Usually, it is drawn in the shape of the “T”. The left section (property) refers to Assets and right section (capital) refers to Liabilities & Equity.
Use of the Balance sheet in practice: the balance sheet should be structured so that it clearly shows what the company owns (i.e. capital structure) and from what resources the assets were acquired (i.e. property structure). Financial situation (financial result as a balance between assets and liabilities), the degree of leverage, liquidity, etc. are other data that can be read from the balance sheet. But it does not give the information on the financial result. This provides the income statement.
The balance sheet is prepared at least at the end of the accounting period as a final (annual) balance sheet. However, it is possible to compile it more frequently (biannually, quarterly or monthly) as a full (current) sheet. The balance sheet is also necessary to prepare for special events such as setting up the business - starting balance sheet, change of the company legal form, merger, business division, liquidation, rehabilitation, bankruptcy, compensation). Such a statement is called an extraordinary balance sheet.
The income statement and balance sheet with additional annex together form the annual financial statements. Enterprises with their property (20 %) in other companies compile the consolidated financial statements.
Each economic operation causes changes in balance sheet items, both on the right and the left side. This principle of balance (Σ assets = Σ liabilities), i.e., that every change is captured twice, is the basis for double entry bookkeeping system.