Understanding a Balance Sheet With Examples and Video

Current liabilities are customer prepayments for which your company needs to provide a service, wages, debt payments and more. While current assets can be converted into cash within a year, liquidating non-current assets, such as fixed assets (PP&E), can be a time-consuming process. The assets section is ordered in terms of liquidity, i.e. line items are ranked by how quickly the asset can be liquidated and turned into cash on hand. A lot of times owners loan money to their companies instead of taking out a traditional bank loan. Investors and creditors want to see this type of debt differentiated from traditional debt that’s owed to third parties, so a third section is often added for owner’s debt. This simply lists the amount due to shareholders or officers of the company.

Everything listed is an item that the company has control over and can use to run the business. 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.

Shareholders’ equity reflects how much a company has left after paying its liabilities. Shareholders’ equity belongs to the shareholders, whether public or private owners. Assets are anything the company owns that holds some quantifiable value, which means that they could be liquidated and turned into cash. Balance sheets are useful tools for individual and institutional investors, as accrued expenses in balance sheet well as key stakeholders within an organization, as they show the general financial status of the company.

In both formats, assets are categorized into current and long-term assets. Current assets consist of resources that will be used in the current year, while long-term assets are resources lasting longer than one year. 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. Pay attention to the balance sheet’s footnotes in order to determine which systems are being used in their accounting and to look out for red flags.

Step 1: Determine the Reporting Date and Period

Knowing what goes into preparing these documents can also be insightful. While income statements and cash flow statements show your business’s activity over a period of time, a balance sheet gives a snapshot of your financials at a particular moment. Your balance sheet shows what your business owns (assets), what it owes (liabilities), and what money is left over for the owners (owner’s equity). Part of US GAAP is to have financial statements prepared by using the accrual method of accounting (as opposed to the cash method). The accrual method means that the balance sheet must report liabilities from the time they are incurred until the time they are paid. It also means the balance sheet will report assets such as accounts receivable and interest receivable when the amounts are earned (as opposed to waiting until the money is received).

Balance Sheets 101: What Goes On a Balance Sheet?

Finally, unless he improves his debt-to-equity ratio, Bill’s brother Garth is the only person who will ever invest in his business. The situation could be improved considerably if Bill reduced his $13,000 owner’s draw. Unfortunately, he’s addicted to collecting extremely rare 18th century guides to bookkeeping. Until he can get his bibliophilia under control, his equity will continue to suffer. Finally, since Bill is incorporated, he has issued shares of his business to his brother Garth.

Examples of balance sheet analysis

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2. With this in mind, she might aim to grow her easily liquidated assets by keeping more cash on hand in the business checking account.
3. When investors ask for a balance sheet, they want to make sure it’s accurate to the current time period.
4. When creating a balance sheet, start with two sections to make sure everything is matching up correctly.
5. These revenues will be balanced on the assets side, appearing as cash, investments, inventory, or other assets.
6. Plus, this report form fits better on a standard sized piece of paper.

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It is important to understand that balance sheets only provide a snapshot of the financial position of a company at a specific point in time. It is helpful for business owners to prepare and review balance sheets in order to assess the financial health of their companies. Businesses should be wary of companies that have large discrepancies between their balance sheets and other financial statements. It may not provide a full snapshot of the financial health of a company without data from other financial statements. Examples of activity ratios are inventory turnover ratio, total assets turnover ratio, fixed assets turnover ratio, and accounts receivables turnover ratio. It is crucial to remember that some ratios will require information from more than one financial statement, such as from the income statement and the balance sheet.

Current Assets

It shows what belongs to the business owners and the book value of their investments (like common stock, preferred stock, or bonds). The three core financial statements—income statement, balance sheet, and cash flow statement—are intricately connected and collectively present a comprehensive view of a company’s current financial condition. While the financial statements are closely intertwined and necessary to understand a company’s financial health, the balance sheet is particularly useful for ratio analysis. The fundamental accounting equation states that a company’s assets must be equal to the sum of its liabilities and shareholders’ equity. The asset section is organized from current to non-current and broken down into two or three subcategories. This structure helps investors and creditors see what assets the company is investing in, being sold, and remain unchanged.

Assets represent things of value that a company owns and has in its possession, or something that will be received and can be measured objectively. Liabilities are what a company owes to others—creditors, suppliers, tax authorities, employees, etc. They are obligations that must be paid under certain conditions and time frames. The balance sheet is just a more detailed version of the fundamental accounting equation—also known as the balance sheet formula—which includes assets, liabilities, and shareholders’ equity.

The liabilities section is broken out similarly as the assets section, with current liabilities and non-current liabilities reporting balances by account. The total shareholder’s equity section reports common stock value, retained earnings, and accumulated other comprehensive income. Apple’s total liabilities increased, total equity decreased, and the combination of the two reconcile to the company’s total assets. Understanding and analyzing key financial statements like the balance sheet, income statement, and cash flow statement is critical to painting a clear picture of a business’s past, present, and future performance.

A bank statement is often used by parties outside of a company to gauge the company’s health. Balance sheets allow the user to get an at-a-glance view of the assets and liabilities of the company. Shareholder equity is the money attributable to the owners of a business or its shareholders. It is also known as net assets since it is equivalent to the total assets of a company minus its liabilities or the debt it owes to non-shareholders. That’s because a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholder equity).

Liabilities are few—a small loan to pay off within the year, some wages owed to employees, and a couple thousand dollars to pay suppliers. For Where’s the Beef, let’s say you invested $2,500 to launch the business last year, and another $2,500 this year. You’ve also taken $9,000 out of the business to pay yourself and you’ve left some profit in the bank. The color formatting abides by general financial modeling best practices, which make building a financial model easier for the one creating the model and for purposes of auditing. By submitting this form, you consent to receive email from Wall Street Prep and agree to our terms of use and privacy policy. Liabilities are also separated into current and long-term categories.

A balance sheet must always balance; therefore, this equation should always be true. Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links trial balance explained: your complete guide on our site.