Balance Sheet: Explanation, Components, and Examples

how to read a balance sheet

Assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets. The current ratio measures a company’s liquidity, or ability to meet its near-term obligations. But as you become more familiar with the language of financial statements it may become easier to make sense of them. Balance sheets are typically prepared at the end of set periods (e.g., annually, every quarter).

how to read a balance sheet

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In conclusion, understanding the liabilities on a balance sheet allows investors and stakeholders to assess a company’s financial health, both in the short and long term. Keep in mind that comparing these figures to industry benchmarks and analyzing trends over time can offer a clearer what are the three types of accounts picture of how a company is managing its financial obligations. Although the balance sheet is an invaluable piece of information for investors and analysts, there are some drawbacks. For this reason, a balance alone may not paint the full picture of a company’s financial health.

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Important ratios that use information from a balance sheet can be categorized as liquidity ratios, solvency ratios, financial strength ratios, and activity ratios. Liquidity and solvency ratios show how well a company can pay off its debts and obligations with existing assets. Financial strength ratios, such as the working capital and debt-to-equity ratios, provide information on how well the company can meet its obligations and how the obligations are leveraged. These ratios can give investors an idea of how financially stable the company is and how the company finances itself.

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The remaining amount is distributed to shareholders in the form of dividends. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. For instance, accounts receivable should be continually assessed for impairment and adjusted to reveal potential uncollectible accounts. A lender will usually require a balance sheet of the company in order to secure a business plan. These ratios can yield insights into the operational efficiency of the company. Financial ratio analysis is the main technique to analyze the information contained within a balance sheet.

  1. A liability is any money that a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds issued to creditors to rent, utilities and salaries.
  2. Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.
  3. The balance sheet previews the total assets, liabilities, and shareholders’ equity of a company on a specific date, referred to as the reporting date.
  4. These ratios can provide insight into the company’s operational efficiency.
  5. Or you might compare current assets to current liabilities to make sure you’re able to meet upcoming payments.

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We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. Balance sheets also play an important role in securing funding from lenders and investors. These operating cycles can include receivables, payables, and inventory. It also yields information on how well a company can meet its obligations and how these obligations are leveraged. Shareholders’ equity will be straightforward for companies or organizations that a single owner privately holds.

Depending on the company, different parties may be responsible for preparing the balance 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 insights you can gain from the balance sheet—along with other financial statements—allow you to make informed financial decisions as your business grows. Public companies, on the other hand, are required to obtain external audits by public accountants, and must also ensure that their books are kept to a much higher standard. This category is usually called “owner’s equity” for sole proprietorships and “stockholders’ equity” or “shareholders’ equity” for corporations. It shows what belongs to the business owners and the book value of their investments (like common stock, preferred stock, or bonds). Shareholders’ equity is the initial amount of money invested in a business.

Current liabilities are the company’s liabilities that will come due, or must be paid, within one year. This includes both shorter-term borrowings, such as accounts payables (AP), which are the bills and obligations that a company owes over the next 12 months (e.g., payment for purchases made on credit to vendors). These are the financial obligations a company owes to outside parties. To read a balance sheet, you need to analyze your business’s assets, liabilities, and equity to get a clear picture of what your company owns and owes. Balance sheets and other financial statements are generally included in a company’s quarterly and annual reports to shareholders.

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). This balance sheet also reports Apple’s liabilities and equity, each with its own section in the lower half of the report. 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.

Similarly, if the company issues new debt or pays off a loan, these transactions will affect the liabilities section of the balance sheet. The cash flow statement will also capture these changes in the financing activities section, displaying the cash inflow or outflow related to debt transactions. Analyzing long-term debt can provide valuable information about a company’s financial stability and how effectively it can manage long-term obligations. Adequate levels of long-term debt can be advantageous for a company, as it could indicate lower interest expenses and better financial leverage. Current liabilities can give an insight into the company’s short-term financial health, such as its ability to pay off obligations and manage cash flow efficiently. Property, plant, and equipment (PP&E) are tangible long-term assets used in the production or supply of goods and services.