Balance Sheet: a statement of the assets, liabilities, and capital of a business (or other organisation) at a particular point in time, detailing the balance of income and expenditure over the preceding period.
In this blog we help you read the balance sheet of your company.
Assets = Liabilities + Owners’ equity
Goods/resources owned and controlled by the company. E.g. cash in the back, company vehicle, inventory etc.
Debts of company. E.g. loans, credit card payments, salaries, rent, supplies money and taxes.
What you own minus what you owe (i.e. retained earnings, or asset value minus liabilities).
The balance sheet gives you a snapshot of your business’ health for a given accounting period.
It’s made up of 3 parts – assets on one side, and liabilities and equity on the other. The balance sheet is made using the data in the company’s ledger, which records all transactions for different accounting time frames. The sum total of the assets should equal the sum of the liabilities and equity.
A balance sheet is officially drawn up quarterly, and then at the end of the fiscal year. The balance sheet date marks the date it was prepared. However, it can be used to draw information on any given date of the year.
1. The assets section lists all the current assets, long-term assets and intangible assets. Together they total-up as the company’s assets, and must match the total of the general ledger’s.
Current assets can be liquidated within a year and are usually written in relative order of liquidity (i.e. what can convert into cash the easiest). Here you will find –
- accounts receivables
- marketable securities
Long-term assets are all non-current assets that could be used for a year without depreciation. Their value is indicated in the general ledger. It commonly includes –
Intangible assets are non-physical and non-monetary. Their value, too, is indicated in the general ledger. Examples are –
2. The liabilities section determines the current and long-term liabilities of the company.
Current liabilities are owed within the year since the date of the balance sheet. Ordinarily they are –
- accounts payable
- accrued liabilities
- short-term notes payable
Long-term liabilities (a.k.a. fixed liabilities) can’t be settled within the year since the date of the balance sheet. Customarily you will find –
- long-term notes payable
- bonds payable
- pension plan obligations
3. The equity section calculates the retained earnings (which isn’t entered on the balance sheet but is required to calculate the owner’s equity), and the owner’s equity.
Retained earnings reflect the profit made by the company in a particular period. The calculation is such:
- the ending balance of retained earnings from the previous period is put down
- expenses from the revenue are minused to get the net income
- the previous ending balance is added to the net income
- the dividends paid to investors are subtracted
Owner’s equity = capital invested + retained earnings. These take into account common stock, treasury stock and other equity accounts for the total.
So that’s the calculation. Now remember, Assets = Liabilities + Owner’s Equity. So the two columns must add up for an accurate balance sheet or something is amiss.
The balance sheet, along with the income statement and the statement of cash flows, is one of the main financial statements for any business.
Profit and loss is the fundamental reason for the art of accounting. And it is relevant to the progress of your business. It is imperative you review your P&L, as well as your balance sheets to understand cash flows and where your company stands.