Final answer:
Balance sheets list a company's assets and liabilities, providing a snapshot of its financial position. They show the net worth by subtracting liabilities from assets, with bank capital being the net worth in the context of a bank.
Step-by-step explanation:
Balance sheets are accounting tools that provide a snapshot of a company's financial position at a particular time. They list a company's assets, which are valuable items owned and can be used to produce something or settle debts, and liabilities, which are debts or obligations owed to others. The net worth, also known as bank capital in the context of a bank's balance sheet, is calculated by subtracting the total liabilities from the total assets.
For instance, if you own a home, it's considered an asset and the mortgage on that home is a liability. The value of the asset minus the liability represents your equity in the home. Similarly, a bank has assets such as cash in vaults, loans to customers, and reserves held at the Federal Reserve. The liabilities are deposits and other obligations the bank must pay to others. It's critical to understand that in a bank's operations, an asset-liability time mismatch may exist, as customers can withdraw their deposits (bank's liabilities) in the short term, while assets, such as loans, are usually repaid over a longer period.