New business owners' guide to reading balance sheets
A balance sheet is a summary of the financial balances of an individual or organization. It is one of the most crucial financial statement when it comes to managing your business. By reading a balance sheet, you are allowed to analyze and understanding your company’s reported assets, liabilities and equipment. From that you get a picture of how business perform, what your business has and owes.
Beside that, we totally understand that you want to focus on your core business activities to grow your company. Why don’t you pass your bookkeeping task to our experts? Below is all you need to know about a balance sheet.
What is a balance sheet?
Balance sheet, some people named it as “statement of financial position”. It offered an accurate picture of a company or organization’s overall strengths and value. The balance sheet shows a snapshot of the assets, liabilities, and equities of your organization as of at a particular date, otherwise known as the “reporting date”. Balance sheet is related with income statement and statement of cash flow, where these two are also an important financial statement to assess the business. Balance sheet usually prepared and reported on a monthly or quarterly basis, it depends on company policy or law.
How balance sheet work?
The balance sheet is It split into 2 sections. As its name, it should balance based on this fundamental equation: Assets = Liabilities + Equity. As equation showed, company’s assets are equal by the company’s liabilities and shareholders’ equity.
Things that owned by your business is consider as your company asset. Assets is always look upon as positives. Assets is separated into 2 parts: current asset and non-current assets. For example, cash, inventory prepaid expenses are more liquid accounts, therefore, we consider them as current assets. Those accounts a lifespan of over a year and more are considered as non-current assets.
Obviously, liability is the opposite of asset. For example, those loan or money that your company has to pay to a debtor are count as liability. Liability also sperate as current liabilities and non-current liabilities.
When you take all of the company's assets and subtract the liabilities, what remains is the equity. These statements are key to both financial modelling and accounting that consists of share capital plus retained earnings.