One of the most important financial reports a business makes is the statement of financial position, otherwise known as a balance sheet. Balance sheets show the overview of the company’s financial performance within the specified accounting period. Management sees the increase and the decrease of assets such as cash, accounts receivable and inventory on the balance sheet together with the liabilities to other business and return of investment earned.
To know how you can read your business’s performance when you prepare balance sheet for your business, the following information will provide facts on how you can read and understand your balance sheet.
Components of a Balance Sheet
To aid you in understanding your balance sheet, you should first have the knowledge regarding the components of a balance sheet as seen on the printable sheet templates. The essential components of a balance sheet are as follows:
- Assets – This component of a balance sheet pertains to the properties owned and acquired by the business in the duration of its operations. This is further divided into two categories:
- Current Assets – These assets are convertible to cash within a year such as accounts receivable and short term marketable securities.
- Non-current Assets – Properties under this category are more permanent in nature like plant assets or depreciating properties like the production equipment.
- Liabilities – Due the needed funding and resources for the continuity of operations, a business cannot rely on the capital alone. In this section of the balance sheet lies the obligations of the business to other institutions for monetary credits. As indicated on the sample sheet templates, here are its divisions:
- Current Liabilities – These debts are expected to be due and to be paid in full within a year.
- Non-current Liabilities – Coverage of credits under this group is due a year or more depending on the stipulations of the contract agreement.
- Equity – The assets and monetary contributions at the inception of the business is considered as the working capital of the business otherwise known as equity. The gains and losses of the business operations and investments affect the earnings on this component.
Tips for Reading a Balance Sheet
To understand the contents of your balance sheet, the following are the tips for reading a balance sheet with formats shown on the sample balance sheet templates for your reference:
- Know the accounting equation behind balance sheets. It is essential for you to know the basic equation the balance sheet follows which is Assets + Liabilities = Equity. Any changes or concerns on the computation of the information on the balance sheet, you just need to refer back to this equation.
- Have knowledge on the components of the balance sheet. As shown on the sheet templates in Word format, you must know the components of the sections of the balance sheet such as assets, liabilities and equity and how they are interrelated.
- Use ratios to analyze the balance sheet information. There are various financial ratio analysis formulas that defines a particular performance of the business. Some of the information on the balance sheet are included on this ratio, making it easier to understand the business’s financial performance.
Knowing how to read your balance sheet will make you see how well your business is doing and what improvements you need to add to improve performance.