Shrinking of balance sheet means to sell the assets of company for paying loan. Assets are the base of any company. When any company’s earning goes to down side, at that time, it starts to take tension. Every creditor who knows that company is not earning the profit, wants to get his money back more fastly. So, company has one solution. To sell the assets and pay to creditors. But you know that always assets equal to the liabilities. Because assets of company is not personal property of any shareholder. It means whole share capital will decrease. So, shrinking of balance sheet is dangerous signal for others who deals with company but it is hopeful signal for company, because its life is saved from bankruptcy through shrinking.
More Deep Explanation of Balance Sheet Shrinking
If any company’s debt problem solved by selling of assets, at that time, company sells its some business part to other. In accounting language, it is called to merge some part in other company. In this deal, share capital will be divide in two parts. one part is sold for getting money. This money is used for paying debt.
Explanation through Following Graph