What is a balance sheet?

A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It illustrates the relationship between assets, liabilities, and owner's equity, allowing stakeholders to understand the financial strength and stability of a business.

The assets section lists everything the company owns, such as cash, inventory, and property. Liabilities reflect what the company owes, including loans and accounts payable. Owner's equity represents the owner’s claim on the assets after all liabilities have been settled. This equation—Assets = Liabilities + Owner’s Equity—demonstrates that a balance sheet always balances.

In contrast, the other options refer to different types of financial reports. A summary of cash flow describes the inflows and outflows of cash over a period. A formal record of all financial transactions refers to a general ledger, which records all transactions that affect financial statements. A profit report specifically looks at revenues and expenses to determine profitability, rather than the complete financial position depicted in a balance sheet. Understanding the balance sheet is crucial for stakeholders as it provides insights into the company's financial health and can influence investment decisions or creditworthiness.