The short answer to the question “what is a balance sheet?” is this: a balance sheet is a two-sided financial statement showing the assets a company holds on a specific date and the sources used to finance those assets. The left side shows the assets, i.e. what the company has. The right side shows the liabilities and equity; this side shows debts and the share the shareholders have left in the company. The totals of the two sides are always equal.
For an investor considering buying a company, becoming a partner in it or lending to it, the balance sheet is one of the first documents opened. In this article, we explain the legal framework of the balance sheet, how to read the asset and liability items one by one, and the seven items an investor should look at in particular. Since the company’s profit for the period and its cash movements are the subject of separate statements, we focus here only on the balance sheet itself.
Summary
Key Takeaways
- The essence of the answer to “what is a balance sheet?” is that it shows the company’s assets on a given day and whether those assets are financed by debt or by shareholders’ capital.
- The Uniform Chart of Accounts groups the balance sheet into five account classes: current assets, non-current assets, short-term liabilities, long-term liabilities and equity.
- The distinction between current and non-current assets, and between short-term and long-term liabilities, is made using the one-year or normal operating cycle criterion.
- Under the General Communiqué on the Implementation of the Accounting System, an item titled “Other” is shown under a separate heading if it exceeds 20% of the total of its group.
- Under Article 376 of the Turkish Commercial Code, if half of the capital and statutory reserves is left uncovered due to losses according to the last annual balance sheet, management immediately calls a general assembly meeting.
What is a balance sheet, and what question does it answer?
A balance sheet is a snapshot of a company on a single day. While the income statement shows the film of a period, the balance sheet tells you what the company owns and how much it owes to whom on the last day of that period. That is why a balance sheet always has a date in its heading; in business, this date is most often 31 December.
The balance sheet is only one part of the financial reporting set. We explained what the other statements are and for whom they are prepared in our article what is financial reporting . In this article, we cover the first statement of that set in a way that can be read line by line.
There is also a limit to keep in mind when reading a balance sheet. The General Communiqué on the Implementation of the Accounting System Serial No. 1 explicitly states that the balance sheet is not a statement reflecting the current value of assets or the amount that would be obtained if they were sold in liquidation. A factory building appears on the balance sheet at cost less accumulated depreciation; its market value may be very different.
Who prepares the balance sheet, and under which rules?
Responsibility for preparing the balance sheet lies with the company’s management. Article 64 of the Turkish Commercial Code (TTK) requires every merchant to keep commercial books, and Article 66 requires an inventory to be taken at the end of each operating period. Under the Code, a financial year cannot exceed twelve months. The balance sheet is the summarized and classified form of this inventory.
There are two common forms of balance sheet in Turkey. Companies keeping books on the balance sheet basis use the balance sheet prepared with the Uniform Chart of Accounts based on the Tax Procedure Law (VUK). Companies subject to independent audit prepare a statement of financial position in accordance with the standards issued by the Public Oversight Authority (KGK). For which company applies which framework, see What Is TFRS .
What are assets and liabilities, and why does the balance sheet always balance?
Assets are the total of the resources the company controls that are expected to provide economic benefit in the future. Liabilities and equity show the source of these assets: they came either from a creditor, or the shareholders contributed them or left profit in the company. Since every asset has a source, the two sides are mathematically equal.
This equality is the fundamental equation of the balance sheet: assets equal the sum of liabilities and equity. When the company takes out a bank loan, the bank account on the asset side and the bank loan on the liability side increase by the same amount. When a shareholder contributes capital, equity on the liability side grows instead. The balance is not disturbed; only the type of source changes.
The Communiqué does not allow the balance to be achieved by netting items against each other. According to the text, no offsetting may be made between balance sheet accounts. For example, a company with both a deposit and a loan at the same bank does not net the two and show a single figure; the deposit appears on the asset side and the loan on the liability side, separately.
Current and non-current assets: reading the asset side
The asset side is divided into two large groups. Under the General Communiqué on the Implementation of the Accounting System, current assets are assets expected to be converted into cash or used within one year or the business’s normal operating cycle. Non-current assets are assets that, under normal conditions, are not intended to be disposed of within one year or whose benefit will not be exhausted within one year.
In the Uniform Chart of Accounts, current and non-current assets are divided into the following main groups:
| Account class | Main account groups | Question to ask when reading |
|---|---|---|
| 1 Current assets | Cash and cash equivalents, marketable securities, trade receivables, other receivables, inventories, prepaid expenses, other current assets | Can these items really be converted into cash within a year? |
| 2 Non-current assets | Trade and other receivables, financial assets, tangible fixed assets, intangible fixed assets, assets subject to depletion, other non-current assets | What do the company’s production capacity and long-term investments depend on? |
| 3 Short-term liabilities | Financial liabilities, trade payables, other payables, advances received, taxes payable and other obligations, provisions for liabilities and expenses | Which assets will cover the debts payable within a year? |
| 4 Long-term liabilities | Financial liabilities, trade payables, other payables, advances received, provisions for liabilities and expenses | Is the burden maturing beyond one year reasonable relative to the company’s size? |
| 5 Equity | Paid-in capital, capital reserves, profit reserves, retained earnings, accumulated losses, net profit (loss) for the period | Is the shareholders’ stake growing or being eroded by losses? |
The same type of item can appear in two different classes. A receivable maturing in two years is tracked under non-current assets. Under the Communiqué, the portion whose maturity falls below one year at the end of the period is transferred to the related account under current assets. Checking whether this transfer has been made when reading the balance sheet helps you see the maturity structure correctly.
The 12-month criterion for companies applying TFRS
In a statement of financial position prepared under KGK standards, the logic is similar, but the criteria are more detailed. Under paragraph 99 of TFRS 18, to be applied from 2027, an asset is a current asset if it is expected to be realized within the normal operating cycle, is held primarily for trading, will be realized within 12 months after the reporting period, or is unrestricted cash or a cash equivalent. Every asset outside these conditions is considered non-current.
There is a similar rule on the liability side. Paragraph 101 of TFRS 18 requires a liability to be classified as current if, at the end of the reporting period, the company does not have the right to defer settlement for at least 12 months. A breach of a covenant in a loan agreement may remove this right; a loan that appears long-term can therefore suddenly become short-term.
The liability side: liabilities and equity
The liability side explains where the company’s money came from. Under the Communiqué, short-term liabilities consist of debts payable within one year, and long-term liabilities of debts payable after one year. Bank loans, debts to suppliers, advances received from customers and taxes payable appear on this side.
The group most often overlooked on the liability side is provisions for liabilities and expenses. A provision for severance pay or the tax provision calculated on profit for the period shows burdens that have arisen but not yet been paid. Since the general corporate income tax rate is 25% under Article 32 of Corporate Income Tax Law No. 5520, in a profitable company this provision may make up a significant part of short-term liabilities.
What does equity show?
Equity is the shareholders’ net stake in the company. Under the Communiqué, equity consists of paid-in capital, capital reserves, profit reserves, retained earnings or accumulated losses, and net profit or loss for the period. Accumulated losses and loss for the period are shown in this group as deduction items, with a minus sign.
The difference between capital reserves and profit reserves matters. Profit reserves consist of profit the company earned through its own operations and did not distribute. Capital reserves come from non-operating items such as share premium or revaluation surplus. The Communiqué states that capital reserves cannot be transferred to the income statement as income.
Thresholds when reading a balance sheet
Source: Turkish Commercial Code Art. 376, General Communiqué on the Implementation of the Accounting System Serial No. 1, TFRS 18
How to read a balance sheet: 7 items an investor should look at
Answering the question “what is a balance sheet?” in theory is easy; the real work is reading the statement for a decision. Our practical answer to how to read a balance sheet is to start not from the totals but from the items where risk accumulates. The items we look at in the first pass when reviewing a company with our clients are:
- Cash and cash equivalents: Cash and bank balances show the money the company can use immediately. A one-off collection falling on the balance sheet date may make this figure look stronger than it is; compare it with the previous period.
- Trade receivables and doubtful receivables: Receivables growing rapidly relative to sales may suggest collection problems. Doubtful trade receivables and the provision set aside for them show how much cannot be collected.
- Inventories: High inventory does not always mean strength. Whether a provision for impairment of inventory has been set aside lets you see whether old or unsaleable goods are still carried at cost in the statement.
- Tangible fixed assets and accumulated depreciation: High accumulated depreciation relative to the gross amount may indicate that the machinery is ageing and that investment will be needed soon.
- Financial liabilities: The split of bank loans between short and long term shows how much the company will repay over the next 12 months. Principal installments of long-term loans are tracked on a separate line within short-term financial liabilities.
- Receivables from shareholders and payables to shareholders: These two items show the flow of money between the company and its shareholders. Large balances that have remained open for a long time are a matter the investor should ask about separately.
- Accumulated losses: This negative item in equity shows the extent to which capital has been eroded. If the loss exceeds a certain threshold, the TTK 376 process described below begins.
In addition to these seven items, also look at the lines titled “Other.” Under the Communiqué, an item shown under “Other” is shown under a separate heading if it exceeds 20% of the total of its group. Grouping large amounts in a general line may breach this rule and calls for an explanation.
Which ratios give a quick picture?
A few ratios derived from balance sheet items make the initial assessment easier. These ratios are not limits set by legislation; they are interpreted differently depending on the sector, the company’s age and its growth stage. The table below summarizes the ones we use most often:
| Rate | How is it calculated? | What does it tell you? |
|---|---|---|
| Current ratio | Current assets / short-term liabilities | Ability to cover debts due within a year with assets that will turn into cash within a year |
| Acid-test ratio | (Current assets – inventories) / short-term liabilities | Whether short-term debts can be paid without selling inventory |
| Cash ratio | Cash and cash equivalents / short-term liabilities | Ability to pay with cash on hand alone |
| Debt-to-equity ratio | Total liabilities / equity | The extent to which the company is financed by debt |
| Equity ratio | Equity / total assets | How much of the assets is covered by shareholders’ money |
A single year’s ratio says little. We recommend comparing the same ratio over at least two or three years and with similar companies in the same sector. Since the balance sheet is a snapshot of a single day, a loan repayment or a large collection falling at year-end may temporarily improve the ratios.
Capital loss and over-indebtedness: how does TTK 376 use the balance sheet?
There is one point we remind investors who ask what a balance sheet is: the balance sheet is a statement read not only by investors but also by the law. Under Article 376 of the Turkish Commercial Code, if the last annual balance sheet shows that half of the total of capital and statutory reserves is left uncovered due to losses, the board of directors immediately calls a general assembly meeting and presents remedial measures. Article 633 of the Code applies these provisions to limited companies by analogy.
If the threshold reaches two thirds, the consequences become more serious. According to the article, if the general assembly convened in this case does not decide to make do with one third of the capital or to replenish the capital, the company is automatically dissolved. If there is a suspicion of over-indebtedness, management prepares an interim balance sheet showing the assets both on a going concern basis and at their probable sale prices.
Provisional Article 1 of the Ministry of Trade’s communiqué on the implementation of Article 376 allows foreign exchange losses arising from foreign currency debts not yet paid to be disregarded in these calculations. Update (October 2026): With the amendment published in the Official Gazette dated 10 October 2026 and numbered 33396, the term of this provisional provision was extended from 1 January 2027 to 1 January 2028. Excluding foreign exchange losses from the calculation is an optional right; it does not change the fact that the loss exists in economic terms.
Let us read the target company’s balance sheet together
You can request a preliminary review with our team of experts to see the risky items on the balance sheet of the company you are considering investing in and the differences between its tax records and standards-based statements.
Common mistakes when reading a balance sheet
One of the questions our clients ask most often is why a company that looks profitable is short of cash. The answer is often in the balance sheet: the profit may be sitting in uncollected trade receivables or in inventory waiting in the warehouse. Reading cash and cash equivalents together with receivables and inventory on the balance sheet clarifies this picture.
The idea that “if equity is high, the company is valuable” can also be misleading. Equity is the accounting amount remaining after debts are deducted from the book value of assets. What the company is worth on the market depends on profitability expectations, the sector and negotiation; that is why acquisition decisions require a separate valuation beyond the balance sheet figure.
The third mistake is separating the balance sheet from its notes. The Communiqué provides for notes as additional information to the balance sheet. Off-balance-sheet burdens such as collateral given, mortgages and guarantees are usually disclosed in this section; this is the part an investor must read before signing a contract.
Finally, do not expect the tax balance sheet and the statement of financial position prepared under the standards to give the same figures. The two frameworks apply different rules on issues such as valuation, provisions and leases. In a company with foreign shareholders, the difference between the statement sent to the parent company and the balance sheet filed with the tax office can usually be explained with a reconciliation table.
From “what is a balance sheet?” to an investment decision
The balance sheet is the starting point for getting to know a company; it does not lead to a decision on its own. Read together with the income statement and cash flows, it shows both the company’s current position and how it got there. For the current Turkish texts of the standards, see the Turkish Accounting Standards page of KGK .
At Akal CPA, we review the target company’s balance sheet item by item for investors and report the differences between tax records and standards-based statements. As part of our financial reporting services we prepare the balance sheet, statement of financial position and group reporting packages from the same bookkeeping system. For the other steps of the investment process, investment guide category.
Let's map out your tailored roadmap together
At Akal CPA, every engagement starts with a preliminary review based on your company’s structure and goals. If you would like to map out a roadmap tailored to you together for reading the balance sheet of the company you are considering investing in and spotting risky items, contact us.
The amounts and rates in this article are current as of October 2026.
This content was prepared by the Akal CPA team of experts. Since 1975, Akal CPA has provided company formation, accounting, tax and payroll advisory services to domestic and foreign investors in Ankara. The balance sheet groups and classification rules were compiled based on the General Communiqué on the Implementation of the Accounting System Serial No. 1, TFRS 18 and Article 376 of Turkish Commercial Code No. 6102.
This article is for general information only; seek professional advice for your specific situation.
Last updated: 17.10.2026
Frequently Asked Questions
Are a balance sheet and a statement of financial position the same thing?
Both show a company’s assets, liabilities and equity on a specific date. The term “balance sheet” generally refers to the statement prepared under the Uniform Chart of Accounts, and “statement of financial position” to the statement prepared under KGK standards. Since the classification and valuation rules differ, the figures may diverge.
As of what date is a balance sheet prepared?
A balance sheet is prepared as of the last day of the accounting period; for most companies, this date is 31 December. For companies using a special accounting period, the balance sheet date is the end date of that period. Where necessary, an interim balance sheet may also be prepared for interim periods.
What does negative equity mean?
Negative equity shows that accumulated losses exceed capital and reserves, i.e. that debts are greater than the book value of assets. This picture brings the capital loss and over-indebtedness assessment under Article 376 of the TTK onto the agenda. An interim balance sheet and expert assessment are needed to determine the legal consequences of the situation.
Does a newly established company have a balance sheet?
Yes, the TTK requires every merchant to take an inventory when the business opens, and this inventory forms the basis of the opening balance sheet. The opening balance sheet usually includes paid-in capital, the corresponding bank balance and formation expenses. The first year-end balance sheet is prepared at the end of the company’s first operating period.
How can I obtain a company’s balance sheet?
The financial statements of listed companies are disclosed to the public. The balance sheet of a non-public company can only be requested from the company itself, under a confidentiality agreement during partnership or acquisition negotiations. Before investing, we recommend requesting the balance sheets for the last few years together with their notes.
Does a balance sheet alone show a company’s value?
No; the balance sheet mostly shows assets on a cost basis and does not reflect the company’s future earning power. For valuation, profitability, cash-generating capacity, the sector and market conditions are examined together. The balance sheet is one of the inputs to this work.
Turkish 
English 
German 
Spanish 
Russian 
French