Also referred to as a statement of financial position, balance sheet shows the current financial position of the company and is an integral part of the financial statements. It includes all the assets and liabilities of a company in a sequential order which means that the most liquid assets are listed first and the most pressing liabilities are first before smaller ones. It is also a sheet of papers that reflects the solvency of a company. The three most important elements of a balance sheet thus are assets, liabilities and equity.
Assets are financial resources a company has as a result of its past transactions. These assets translate into cash flow into the company that can be used for business purposes. Some examples of assets are cash, plant and machinery, furniture, marketable securities, patents, copyrights and account receivables.
Liabilities are the opposite of assets and are obligations of the company that eventually result in a cash outflow. Some examples of liabilities are notes and bonds payable, income tax, interest payable to lenders, dividends payable and warranty liability.
Equity is that part of the assets that are claimed by the owner. It is the net result of assets after all liabilities have been met. Examples of equity are capital, ordinary and preference share capital, appropriated and inappropriate retained earnings etc.