What a Balance Sheet Tells You

A Balance Sheet is a financial reporting document which shows specific types of financial information about a business. The purpose of this article is to summarize the fundamentals about the content and use of this report.

Overview

A Balance Sheet may be loosely compared to a “snap shot” of the financial status of a business. Like a snap shot, a Balance Sheet shows specific financial information frozen at a specific moment in time, usually at the end of a month, a quarter, or a year. What are the things that are reported?

• Assets (what the business owns)

• Liabilities (what the business owes)

• Equity (the difference between Assets and Liabilities. The “accounting net worth, not the real value of the business)

Assets

Assets are the items of value that are owned by a business. Generally they are divided into the categories of “current” and “non-current” assets.

Current assets are items that are generally acquired and used for short term operations of the business. They can be thought of as things that “turn over” pretty quickly with day to day activities. Examples:

• Cash

• Trade Accounts Receivable

• Other Receivables, generally expected to be paid within the coming year

• Inventory

• Prepaid Expenses

Non-current assets are owned items that are used to produce business profits over a longer period of time than current assets. Examples:

• Equipment, buildings, vehicles, furniture, and other such fixed assets

• Organizational costs, loan fees, and other “amortizable” assets

• Receivables, expected to be paid after the coming year

• Refundable deposits

Liabilities

Liabilities are what the business owes, and like Assets, are generally divided into “current” and “non-current” liabilities.

Current liabilities are debts that are to be settled within the coming year. They are generally incurred in relation to short term business operations. Examples:

• Trade Accounts Payable

• Tax Liabilities (payroll, sales, income, etc.)

• Notes Payable, to be paid within the coming year

Non-current liabilities are debts to be settled after the coming year. Mostly they are related to long term operation of the business. Examples:

• Mortgages Payable

• Notes Payable, due after the coming year

Equity

Equity (sometimes called “Net Worth” or “Capital”) is the difference between Assets and Liabilities. The total of Assets is exactly equal to the total of Liabilities and Equity. Equity can be broken down into several categories.

First there is capital invested in the business. For corporations this is usually shown as Common Stock and Additional Paid in Capital (investment in excess of the stated par value of the shares of stock). For LLC’s, LLP’s, and Proprietorships, invested capital usually is shown as Member Equity, Owner Equity, or just as Equity.

The second primary category is accumulated earnings of the business. Each year a business makes either a profit or a loss. At the end of the year this amount is “closed” into equity. For corporations these cumulative profits/losses (from the very beginning of the business) are usually shown as Retained Earnings. For LLCs, LLPs, and Proprietorships these profits/losses are either added to, or subtracted from the owner(s) equity balance.

Summary

When you look at a Balance Sheet for a business you see, for a specific date, the cost of what a business has acquired or produced, the amount that the business owes, and the “book value” of the difference between the two other balances. Owners, banks, investors, and other stakeholders can analyze the contents of the Balance Sheet, along with other financial reports, to evaluate the health and prospects of the business.