Final answer:
A balance sheet is an accounting tool showing a company's financial position, listing assets, liabilities, and equity to display how assets equal the sum of liabilities and equity.
Step-by-step explanation:
A balance sheet is a crucial accounting tool that summarizes a company's financial position at a specific point in time. It includes three main components: assets, liabilities, and equity. Assets represent the valuable items a company owns or controls, such as cash, reserves, bonds, and loans. Liabilities are what the company owes to others, including debts like deposits in the context of a bank. The equity, also referred to as net worth or bank capital in the case of a bank, is the residual interest in the assets after subtracting liabilities. The balance sheet must balance, meaning that assets will always equal the sum of liabilities and equity.
A bank's balance sheet might list reserves, bonds, and loans as assets and deposits under liabilities. Equity is calculated by subtracting liabilities from the assets. When changes in the financial market occur, such as lower interest rates or relaxed lending standards, they can lead to an increase in the quantity of loans made and received. Finally, the "T" in a T-account separates assets from liabilities, where the addition of net worth on the liabilities side ensures the balance sheet balances to zero.