How to Read & Understand a Balance Sheet
For now, suffice it to say that depending on a company’s line of business and industry characteristics, possessing a reasonable mix of liabilities and equity is a sign of a financially healthy company. A balance sheet is meant to depict the total assets, liabilities, and shareholders’ equity of a company on a specific date, typically referred to as the reporting date. Often, the reporting date will be the final day of the accounting period. The term balance sheet refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time.
What Is A Balance Sheet? (Example Included)
Equity is one of the most common ways to represent the net value of the company. Part of shareholder’s equity is retained earnings, which is a fixed percentage of the shareholder’s equity that has to be paid as dividends. A balance sheet depicts many accounts, categorized under assets and liabilities. Like any other financial statement, a balance sheet will have minor variations in structure depending on the organization.
Owners’ Equity
On the right side, the balance sheet outlines the company’s liabilities and shareholders’ equity. In this example, Apple’s total assets of $323.8 billion is segregated towards the top of the report. This asset section is broken into current assets and non-current assets, and each of these categories is broken into more specific accounts. A brief review of Apple’s assets shows that their cash on hand decreased, yet their non-current assets increased. When analyzed over time or comparatively against competing companies, managers can better understand ways to improve the financial health of a company.
The Balance Sheet Equation
Because the value of liabilities is constant, all changes to assets must be reflected with a change in equity. This is also why all revenue and expense accounts are equity accounts, because they represent changes to the value of assets. Any amount remaining (or exceeding) is how should i record my business transactions added to (deducted from) retained earnings. Different accounting systems and ways of dealing with depreciation and inventories will also change the figures posted to a balance sheet. Because of this, managers have some ability to game the numbers to look more favorable.
- The ability to read and understand a balance sheet is a crucial skill for anyone involved in business, but it’s one that many people lack.
- An asset is something that the company owns and that is beneficial for the growth of the business.
- However, it is crucial to remember that balance sheets communicate information as of a specific date.
- Balance sheets allow the user to get an at-a-glance view of the assets and liabilities of the company.
- On the other hand, long-term liabilities are long-term debts like interest and bonds, pension funds and deferred tax liability.
Companies typically select an ending period that corresponds to a time when their business activities have reached the lowest point in their annual cycle, which is referred to as their natural business year. Generally, sales growth, whether rapid or slow, dictates a larger asset base—higher levels of inventory, receivables, and fixed https://www.quick-bookkeeping.net/ assets (plant, property, and equipment). As a company’s assets grow, its liabilities and/or equity also tend to grow in order for its financial position to stay in balance. The balance sheet is a report that gives a basic snapshot of the company’s finances. This is an important document for potential investors and loan providers.
Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist covering small business marketing content. She is a former Google Tech Entrepreneur and she holds an MSc in International Marketing from Edinburgh Napier University. Companies that report on an annual basis will often use December 31st as their reporting date, though they can choose any date. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.
Returning to our catering example, let’s say you haven’t yet paid the latest invoice from your tofu supplier. You also have a business loan, which isn’t due for another 18 months. It can be sold at a later date to raise cash or reserved to repel a hostile takeover. Kelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development.
Balance sheets are important financial statements that provide insights into the assets, liabilities, and shareholders’ equity of a company. A balance sheet provides a summary of a business at a given point in time. It’s a snapshot of a company’s financial position, as broken down into assets, liabilities, and equity. Balance sheets serve two very different purposes depending on the audience reviewing them. Want to learn more about what’s behind the numbers on financial statements? Explore our eight-week online course Financial Accounting—one of our online finance and accounting courses—to learn the key financial concepts you need to understand business performance and potential.
Please refer to the Payment & Financial Aid page for further information. Everything listed is an item that the company has control over and can use to run the business. This is the value of funds that shareholders have https://www.quick-bookkeeping.net/interest-expense/ invested in the company. When a company is first formed, shareholders will typically put in cash. Cash (an asset) rises by $10M, and Share Capital (an equity account) rises by $10M, balancing out the balance sheet.
Accounts Payables, or AP, is the amount a company owes suppliers for items or services purchased on credit. As the company pays off its AP, it decreases along with an equal amount decrease to the cash account. Property, Plant, and Equipment (also known as PP&E) capture the company’s tangible fixed assets. Some companies will class out their PP&E by the different types of assets, such as Land, Building, and various types of Equipment. The image below is an example of a comparative balance sheet of Apple, Inc. This balance sheet compares the financial position of the company as of September 2020 to the financial position of the company from the year prior.
A second issue is that some information in the report is subject to manipulation. For example, the amount of accounts receivable will depend on the offsetting balance in the allowance for doubtful accounts, which contains a guesstimated balance. Also, accelerated depreciation can be used to artificially reduce the reported amount of fixed assets, so that the fixed asset investment appears to be lower than is really the case. Balance sheets are important because they give a picture of your company’s financial standing.
It is also helpful to pay attention to the footnotes in the balance sheets to check what accounting systems are being used and to look out for red flags. Some financial ratios need data and information from the balance sheet. These are some of the cases in which external parties want to assess and check a company’s financial stability and health, its creditworthiness, and whether the company will be able to settle its short-term debts. Line items in this section include common stocks, preferred stocks, share capital, treasury stocks, and retained earnings.
Under shareholder’s equity, accounts are arranged in decreasing order of priority. On the other hand, long-term liabilities are long-term debts like interest and bonds, pension funds its time for those who benefited from a housing boom to pay up and deferred tax liability. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.
Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. It also yields information on how well a company can meet its obligations and how these obligations are leveraged. It uses formulas to obtain insights into a company and its operations.