How to Read & Understand a Balance Sheet

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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 image below is an example of a comparative balance sheet of Apple, Inc. This balance sheet compares the financial position of the company as of September 2020 to the financial position of the company from the year prior. Once you have adjusted journal entries and posted them in the general ledger, construct a final trial balance.

  • It is important to note that a balance sheet is just a snapshot of the company’s financial position at a single point in time.
  • When investors ask for a balance sheet, they want to make sure it’s accurate to the current time period.
  • They are grouped as current liabilities and long-term liabilities in the balance sheet.
  • To create a balance sheet in your accounting software, go to the reports section and look for financial reports.

Here’s everything you need to know about understanding a balance sheet, including what it is, the information it contains, why it’s so important, and the underlying mechanics of how it works. Thinking about hiring an accounting firm for help preparing your balance sheet? Browse our list of top accounting firms and learn more about their services in Capterra’s hiring guide. Once you have the assets and liabilities sections ready and sorted, arrange them in proper order. Assets should be arranged in the order of liquidity and liabilities in the order of discharge ability.

The Purpose of the Balance Sheet

It is also helpful to pay attention to the footnotes in the balance sheets to check what accounting systems are being used and to look out for red flags. Activity ratios mainly focus on current accounts to reveal how well the company manages its operating cycle. Line items in this section include common stocks, preferred stocks, share capital, treasury stocks, and retained earnings.

  • Check out how to analyze the numbers on your balance sheet to gain actionable insights into your financial health.
  • The current portion of longer-term borrowing, such as the latest interest payment on a 10-year loan, is also recorded as a current liability.
  • The reported amount on the retailer’s balance sheet is the cost of merchandise that was purchased, but not yet sold to customers.
  • All revenues the company generates in excess of its expenses will go into the shareholder equity account.
  • As you can see from the balance sheet above, Walmart had a large cash position of $14.76 billion in 2022, and inventories valued at over $56.5 billion.

List the values of each shareholders’ equity component from the trial balance account, and add them up to calculate total owners’ liabilities. Next, calculate the total liabilities and shareholders’ equity by adding the final sum from step 4 and step 6. Liabilities are obligations to parties other than owners of the business. They are grouped as current liabilities and long-term liabilities in the balance sheet. Current liabilities are the obligations that are expected to be met within a period of one year by using current assets of the business or by the provision of goods or services.

While stakeholders and investors may use a balance sheet to predict future performance, past performance does not guarantee future results. It’s important to note that this balance sheet example is formatted according to International Financial Reporting Standards (IFRS), which companies outside the United States follow. If this balance sheet were from a US company, it would adhere to Generally Accepted Accounting Principles (GAAP). After you’ve identified your reporting date and period, you’ll need to tally your assets as of that date. An asset is anything a company owns which holds some amount of quantifiable value, meaning that it could be liquidated and turned to cash. If you want to go beyond a glance, you can quickly calculate three critical metrics from your business’s balance sheet.

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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. Activity ratios focus mainly on current accounts to show how well the company manages its operating cycle (which include receivables, inventory, and payables). These ratios can provide insight into the company’s operational efficiency.

We also allow you to split your payment across 2 separate credit card transactions or send a payment link email to another person on your behalf. If splitting your payment into 2 transactions, a minimum payment of $350 is required for the first transaction. Now that you understand the basics, let’s discuss (in the next section) the six steps to prepare a balance sheet. To create a balance sheet, you have to follow an order and prepare a few things first—like you would have to do for many other business processes.

Income Statement Example

It is also possible that the reported amount of these and other long-term assets will be reduced when their book values (cost minus accumulated depreciation) have been impaired. The first is money, which is contributed to the business in the form of an investment in exchange for some degree of ownership (typically represented by shares). If you were to add up all of the resources a business owns (the assets) and subtract all of the claims from third parties (the liabilities), the residual leftover is the owners’ equity. Because companies invest in assets to fulfill their mission, you must develop an intuitive understanding of what they are. Without this knowledge, it can be challenging to understand the balance sheet and other financial documents that speak to a company’s health.

For this reason, the balance sheet should be compared with those of previous periods. Generally, a company’s accounts receivable will turn to cash within a month or two depending on the company’s credit terms. Explore our online finance and accounting courses, which can teach you the key financial concepts you need to understand business performance and potential. The information found in a company’s balance sheet is among some of the most important for a business leader, regulator, or potential investor to understand. Just as assets are categorized as current or noncurrent, liabilities are categorized as current liabilities or noncurrent liabilities. External auditors, on the other hand, might use a balance sheet to ensure a company is complying with any reporting laws it’s subject to.

Financial statements, including balance sheets, are typically prepared at the end of a reporting period, such as monthly, quarterly, or annually. For example, if a company’s fiscal year ends on December 31, the balance sheet date for its annual financial work for us hybrid corporation statements would be December 31. The information on the balance sheet is valid and accurate as of that date, and any changes in the company’s financial position after that date will be reflected in the subsequent reporting period’s balance sheet.

Limitations of Balance Sheets

If you think of your financial statements as the story of your business, then the balance sheet serves as the CliffsNotes version of that story. Every transaction in your business impacts the balance sheet in some way. Last, a balance sheet is subject to several areas of professional judgement that may materially impact the report.

Additionally, a company must usually provide a balance sheet to private investors when planning to secure private equity funding. Financial strength ratios can provide investors with ideas of how financially stable the company is and whether it finances itself. However, it is common for a balance sheet to take a few days or weeks to prepare after the reporting period has ended. If a company or organization is privately held by a single owner, then shareholders’ equity will generally be pretty straightforward.

Business Insights

On February 28 prepaid expenses will report $900 (3 months of the insurance cost that is unexpired/still prepaid X $300 per month), and so on. The current asset other receivables is the amount other than accounts receivable that a company has a right to receive. Typically, the balance sheet date is the final day of the accounting period. If a company issues monthly financial statements, the date will be the final day of each month. While an asset is something a company owns, a liability is something it owes.