How to read a balance sheet
Two weeks ago we wrote about “How to read a financial statement”. We hope you found our last blog post useful and valuable. Today, in continuing with that theme, we will provide a simple breakdown of the balance sheet. The balance sheet is another crucial financial component for a business. While the income statement shows how much the company sold and spent in a period of time, the balance sheet shows the state of the company at a particular date.
The elements in a balance sheet change day to day, which allows you and your business to study trends in each category.
Simple Breakdown of a Balance Sheet
What the balance sheet tells you:
- How much cash you have on hand
- How much you own and how much you owe
- How much debt your company has
- How much you need to collect from customers
*Remember that ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
- Assets: what the company owns.
- Assets are organized by how quickly they can be converted into cash
- Current Assets: these assets last for one year or less.
- Cash: physical cash the business has on hand
- Short-term investments: an investment that will expire in one year. This element shows that your company can afford to invest extra cash.
- Accounts receivables: An amount that is owed to you.
- Property, Plant and Equipment:
- Land and building: this is the current value of your land and office building
- Machinery and equipment: the value of the equipment that you own
- Less accumulated depreciation: Your equipment has a life-span and so this number is the reduction in value of your equipment
- Long-term assets: these are assets that will be held for more than a year. This can include patents, goodwill or copyright.
- Long-term investments: investment that you will hold for over a year
- Total Assets: the addition of all your current and long-term assets, and property, plant and equipment
- Liabilities: the debts and obligations of the company
- Current Liabilities: what you owe within a year
- Notes payable: the amount owed written on a formal note
- Accounts payable: an amount you owe within a year, ex: suppliers
- Taxes payable: the amount that must be paid to the government within a year
- Long-term debt: debt that doesn’t have to be paid for within a year ex: leases
- Shareholders’ Equity: The initial and additional amount of money being invested into the business.
- Total Liabilities and Shareholders’ Equity: the addition of all liabilities and SE
The balance sheet can be viewed and studied alongside the income statement for an in depth analysis of the financial state of your business. Similar to the income statement, balance sheets are different among all companies. Balance sheets are only as good as the info that it’s based off of. Whether this report is useful also depends on your bookkeeping. We or your accountant can provide for you a more detailed analysis of your balance sheet.