How is a balance sheet structured?

The balance sheet juxtaposes the assets and liabilities of a company. From the balance sheet, one can see on the one hand how many debts a company currently has, and on the other hand, one can see how the company's assets are invested.

The balance sheet is an important part of accounting because it provides a comprehensive overview of the financial situation of a business. In the business, a distinction is made between assets and liabilities (debt capital). Subtracting the liabilities from the assets results in the net assets or the company’s equity. In accounting, the term "assets" is used for assets. Liabilities consist of debt capital and equity capital and together form the liabilities. The word balance sheet is derived from the Italian word "bilancia" meaning scale. This leads to the principle that the sum of the assets must always match the sum of the liabilities. The asset side shows how the capital of the business is invested. In contrast, the liabilities side shows who financed the capital (through external or internal capital providers).

Asset Side

‍The asset side shows the assets available to the company for business activities. From the assets, one can particularly read in which form (cash, inventory, etc.) the invested capital is present. The assets are divided into current and fixed assets. Current assets consist of liquid funds such as cash, postal accounts, and bank accounts. Also included in current assets are assets that can be converted into liquid funds within a short period, such as accounts receivable (outstanding customer invoices) and inventories. Fixed assets consist of assets that are available to the company for long-term use and are not quickly convertible into liquid funds. These include, for example, office equipment, IT systems, vehicles, or entire buildings.

Liabilities Side

‍The liabilities side shows where the assets on the asset side come from. Therefore, from the liabilities, one can read how the company is financed and who the financiers are. The liabilities are divided into external and equity capital. External capital refers to the short-term debts that the company has towards external creditors. These are typically banks that grant corporate loans or creditors (outstanding invoices that the company still needs to pay). The external capital is organized according to the maturity of repayment. Equity capital refers to the debts that the company owes to its owners. It is calculated as the residual amount from the difference between assets and external capital.

The balance sheet is a snapshot that shows the financial situation of the company at a specific point in time. Companies often choose December 31st as the balance sheet date.

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