What It Is:

A balance sheet is a financial reporting tool giving an overall financial view of a company. It lists both assets (what the company owns), liabilities (essentially, what the company owes to others), as well as stockholders' equity. Along with income statements, balance sheets are one of the most basic elements in financial analysis.

How It Works/Example:

The first section of the balance sheet gives a detailed list of a company's assets, including long-term assets (such as real estate and machinery), current assets (anything that can easily be converted to cash in less than a year), and cash.

The second section goes over the company's liabilities, or what it owes others. This is always an important section for investors to read because even the most stable of companies will face problems if it has an unusually high amount of debt on its books (especially if it has to pay it back sooner rather than later).

The third section outlines stockholders' equity, and provides information on common and preferred stock, retained earnings, and capital surplus.

Why It Matters:

A balance sheet can help both business owners and investors understand the financial health of a company. And because companies generally include the corresponding balance sheet figures from previous quarters, balance sheets can be a useful way for investors to track trends in the way a business pays off its debts, builds its assets, or improves its financial standing.