How to Read Financial Statements: A Beginners Guide

how to read balance sheets

Assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets. The balance sheet is meant to give you a clear view of what your business owes and owns. The insights you can gain from what is overhead cost and how to calculate it the balance sheet—along with other financial statements—allow you to make informed financial decisions as your business grows. The long-term debt number on the balance sheet is an aggregate number, which pools all the debt issued by the company.

Run your business with confidence

Follow the journey of one of history’s most influential figures in accounting, Luca Pacioli, the father of accounting. 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. Below is a sample balance sheet to give you an idea of how it looks. Liabilities may also include an obligation to provide goods or services in the future. Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.

A Crucial Understanding

The section is further subdivided into two parts – Current Assets and Non-Current Assets. It’s the amount of money that would be left if all assets were sold and all liabilities paid. This money belongs to the shareholders, who may be private owners or public investors.

What Is Included in the Balance Sheet?

It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of it. 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. A balance sheet is one of the primary statements used to determine the net worth of a company and get a quick overview of its financial health. 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.

how to read balance sheets

How to Calculate Gross Income for the PPP

A balance sheet is one of three main financial statements publicly traded companies are required to issue regularly. If you own a small business or simply want to analyze your personal financial condition, a balance sheet can help you tremendously. You can start by listing your assets, including your cash, investments, accounts receivable (money you’re owed), any inventory you own, property you have, and so forth. This category is usually called “owner’s equity” for sole proprietorships and “stockholders’ equity” or “shareholders’ equity” for corporations.

  1. Current liabilities form the other end of the working capital of the business.
  2. The balance sheet is one of the three main financial statements, along with the income statement and cash flow statement.
  3. And if a business reinvests its net earnings into the company at the end of the year, those retained earnings are reported on the balance sheet under shareholders’ or owner’s equity.
  4. You can find some excellent balance sheet templates online that can help keep you organized.
  5. According to the balance sheet notes, the inventory is carried at the lower of cost and net realizable value (NRV).

A balance sheet, along with the income and cash flow statement, is an important tool for investors to gain insight into a company and its operations. It is a snapshot at a single point in time of the company’s accounts—covering its assets, liabilities, and shareholders’ equity. The purpose of a balance sheet is to give interested parties an idea of the company’s financial position, in addition to displaying what the company owns and owes. It is important that all investors know how to use, analyze and read a balance sheet.

Because it summarizes a business’s finances, the balance sheet is also sometimes called the statement of financial position. Companies usually prepare one at the end of a reporting period, such as a month, quarter, or year. 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.

If you’re new to the world of financial statements, this guide can help you read and understand the information contained in them. An ability to understand the financial health of a company is one of the most vital skills for aspiring investors, entrepreneurs, and managers to develop. Armed with this knowledge, investors can better identify promising opportunities while avoiding undue risk, and professionals of all levels can make more strategic business decisions. Unlike liabilities, equity is not a fixed amount with a fixed interest rate.

Leave a Comment

Your email address will not be published. Required fields are marked *