Final answer:
The balance sheet represents the relationship between current assets and current liabilities. It provides a snapshot of an entity's financial health, showing assets, liabilities, and net worth, which is especially crucial for banks due to the asset-liability time mismatch.
Step-by-step explanation:
The balance sheet is another means of expressing the relationship between current assets and current liabilities. A balance sheet is an essential accounting tool that lists an entity's assets and liabilities, providing a snapshot of its financial health at a particular point in time. For banks specifically, this includes understanding the asset-liability time mismatch where customers may withdraw a bank’s liabilities in the short term, while the bank's assets, such as loans, tend to be repaid over a longer term. The balance sheet also reflects the bank capital, which is equivalent to the bank's net worth and calculated as total assets minus total liabilities.
On a bank's balance sheet, the assets might include reserves, loans made, and U.S. Government Securities. Liabilities, on the other hand, include deposits made by customers and other debts. The difference between the total assets and total liabilities is the bank’s net worth, which is a measure of its financial strength.