A
balance sheet is useful in expressing the
financial position of a company at a point of time. On one side is
assets (
cash,
inventory,
land, etc). On the other side are
liabilities (
loans to be paid back, accounts payable, etc) and shareholder's
equity (
retained earnings,
stock sold, etc). Both sides must equal out exactly (thus the name BALANCE sheet), as the balance sheet must follow
the fundamental accounting equation (
Assets =
Liabilities +
Equity).
The balance sheet alone is only somewhat useful to someone viewing it. It can give someone a basic idea of what the company has (cash, materials, etc) and how they financed their costs (loans or stock).
As the balance sheet is at a point in time (ie. "Balance Sheet as of January 1, 2001"), it's useless in examining a company's trends alone. Rather it needs to be compared to previous balance sheets, and used together with other financial statements (for example, the statement of cash flows is better for looking at where cash comes from and where it goes).
As with most financial data, there's a certain amount of leeway a company has in the numbers (for example, how a company accounts for depreciation of materials could affect the numbers in several categories), further stressing how a company's balance sheet should be taken with a grain of salt.
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