Understanding a Balance Sheet With Examples and Video

how to read balance sheets

Use this small business guide to gain a better understanding of what a balance sheet is and how to use it. We’ll cover how to prepare a balance sheet and how it can help you understand your business’s financial situation. A detailed reading of the balance sheet is incomplete without quantitative analysis. Ratio analysis of the balance sheet is a good first step in determining the health of the underlying business. Ratio analysis can then be augmented with more complex analyses like the Altman Z-Score. The analysis goes over various sections of WEF’s balance sheet and performs suitable analyses.

  1. Subtract the liabilities on your balance sheet from the assets to find the equity you have in your business or your personal net worth.
  2. Furthermore, the interest rate on the debt is 5.45%, which is higher than the 4.56% rate in the previous year.
  3. This category is usually called “owner’s equity” for sole proprietorships and “stockholders’ equity” or “shareholders’ equity” for corporations.
  4. As opposed to an income statement which reports financial information over a period of time, a balance sheet is used to determine the health of a company on a specific day.

What Can You Tell From Looking at a Company’s Balance Sheet?

how to read balance sheets

Accounts receivables (AR) consist of the short-term obligations owed to the company by its clients. Companies often sell products or services to customers on credit; these obligations are held in the current assets account until they are paid off by the clients. A balance sheet is an important financial statement that summarizes https://www.kelleysbookkeeping.com/ a business’s financial situation. Balance sheets are used to evaluate a company’s performance and ability to meet its financial obligations. Receivables form an important part of WEF’s balance sheet, as they represent sources of cash flow. The cash flow is necessary to meet the company’s short-term obligations.

Owners’ Equity

The common stock and preferred stock accounts are calculated by multiplying the par value by the number of shares issued. Retained earnings are the net earnings a company either reinvests in the business or uses to pay off debt. The remaining amount is distributed to shareholders in the form of dividends. Each category consists of several smaller accounts that break down the specifics of a company’s finances. These accounts vary widely by industry, and the same terms can have different implications depending on the nature of the business. But there are a few common components that investors are likely to come across.

Types of Liabilities

how to read balance sheets

This is also why all revenue and expense accounts are equity accounts, because they represent changes to the value of assets. Apple is a highly profitable and efficient business growing rather quickly, even with its large size. In fact, Apple’s market value is currently about $2.7 trillion — about 43 times its shareholders’ equity or book value. 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.

Understand Current Assets

By looking at the sample balance sheet below, you can extract vital information about the health of the company being reported on. External auditors, on the other hand, might use a balance sheet to ensure a company is complying with any reporting laws it’s subject to. Typically, a balance sheet will be prepared and distributed on a quarterly or monthly basis, depending on the frequency of reporting as determined by law or company policy. Here’s everything you need to know about understanding a balance sheet, including what it is, the information it contains, why it’s so important, and the underlying mechanics of how it works. The current portion of longer-term borrowing, such as the latest interest payment on a 10-year loan, is also recorded as a current liability.

This means that assets, or the means used to operate the company, are balanced by a company’s financial obligations, along with the equity investment brought into the company and its retained earnings. When completing your taxes or providing financial information to regulatory authorities. In some cases, businesses are required to submit their balance sheet and other financial statements for tax purposes. The assets section of the balance sheet contains the asset accounts of the business. They are accounts that lead to the generation of future cash inflows like accounts receivable or are used in the business like property, plant, and equipment (PP&E).

You can also compare your latest balance sheet to previous ones to examine how your finances have changed over time. If you need help understanding your balance sheet or need help putting together a balance sheet, consider hiring a bookkeeper. Depending on the company, different parties may be responsible for preparing the balance https://www.kelleysbookkeeping.com/control-account-definition/ sheet. For small privately-held businesses, the balance sheet might be prepared by the owner or by a company bookkeeper. For mid-size private firms, they might be prepared internally and then looked over by an external accountant. The mortgage company wants you to put 20% down, and they’ll finance the remaining 80%.

A credit brings cash in that the firm can use to purchase an asset. However, this credit is a liability, a debt that must be paid back at a later date. We use assets and liabilities as our main terms, so don’t worry too much about keeping the debits and credits straight. Rearranging this equation a bit shows that assets minus liabilities equals shareholders’ equity. Also known as a company’s book value, shareholders’ equity can be thought of as the theoretical amount investors would have if a company closed its doors, sold off its assets, and paid its debts.

Instead of struggling with Excel, use our free balance sheet template to simplify the process. See website for more details.[1] QuickBooks Live Assisted Bookkeeping[2] QuickBooks Live Full Service Bookkeeping[3] QuickBooks Live Assisted independent contractor agreement for accountants and bookkeepers Bookkeeping requires QuickBooks Online subscription. Some of the relevant accounts for Western Forest Products are discussed below. In all cases, net Program Fees must be paid in full (in US Dollars) to complete registration.

This article will teach you more about how to read an income statement. Liabilities are presented as line items, subtotaled, and totaled on the balance sheet. A balance sheet must always balance; therefore, this equation should always be true.

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