A balance sheet is a common term used to show the financial position of a company such as a company’s assets, liabilities and shareholders’ equity. More simply, it’s a snapshot of the amount that’s been invested into the company by shareholders and what a company owns (assets) and owes (liabilities).
The balance sheet has an equation that represents assets on one side and liabilities including shareholder equity on the other side.
Assets = Liabilities + Shareholders’ Equity
Investors in a company often gain shares in return, so although these funds are not borrowed, they’re not considered an asset because you’re having to give company assets (shares) for these funds.
The company assets should equal the companies liabilities and shareholders’ equity i.e if you invest a €10,000 investment for 5% equity in a company the balance sheet would look as follows:
Assets: €10,000 = Liabilities: €0 + Shareholders Equity: €10,000
Likewise, if that same company then gets a bank loan for €5,000, the balance sheet would look as follows:
Assets: €15,000 (€10,000 shareholders equity & €5,000 cash from a bank loan) = Liabilities: €5,000 (bank loan) + Shareholders Equity: €10,000.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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