What is a balance sheet?
The balance sheet (statement of financial position under IFRS) is a snapshot of what a company owns, what it owes and what shareholders have invested at a single point in time. It rests on the accounting identity: Assets = Liabilities + Equity. Under IAS 1 and US GAAP (ASC 210), it is presented either current/non-current or by order of liquidity.
The three blocks
- Assets: what the company owns.
- Current assets: cash, receivables, inventory, prepaids.
- Non-current assets: fixed assets, intangibles, long-term investments.
- Liabilities: what the company owes.
- Current liabilities: payables, accrued expenses, short-term debt, deferred revenue (<12 months).
- Non-current liabilities: long-term debt, lease liabilities, deferred tax.
- Equity: residual claim of shareholders. Paid-in capital, retained earnings, other comprehensive income, treasury shares.
Balance sheet vs. related statements
- Balance sheet vs. income statement: balance sheet is a point in time; income statement covers a period.
- Balance sheet vs. cash flow statement: cash flow statement explains the change in the cash line between two balance-sheet dates.
Diagnostic ratios
- Current ratio: liquidity headroom.
- Debt-to-equity: leverage and risk profile.
- Return on equity (ROE): profitability against shareholders’ invested capital.
- Working capital: current assets − current liabilities: operational runway in the short term.
Reading the balance sheet in a transaction
In a deal, the balance sheet answers three questions.
- Pricing mechanism: whether locked-box or completion accounts are used, the net debt and working capital definitions are built from balance sheet items, and the side on which each item is placed (cash equivalents, debt-like items, deferred revenue) is the negotiation itself.
- Warranties: the warranty that the financial statements give a true picture and are prepared under consistent accounting policies effectively turns the balance sheet notes into an annex to the contract.
- Hidden liabilities: off-balance-sheet liabilities such as litigation, tax risks and insufficient severance provisions are the most volatile items in the price bridge in Turkish deals and are dealt with through specific indemnities.
For startups, SAFEs and convertible loan agreements (CLAs) appear as debt until they convert, a detail anyone reading the equity line should keep in mind.
Do: reconcile the balance sheet monthly; tie every account to a sub-ledger or schedule.
Don’t: rely on the income statement alone: a profitable company can still run out of cash if its balance sheet is choked by stale receivables or building inventory.