A balance sheet is a financial snapshot that shows what a business owns and owes at a particular moment in time. It adheres to the accounting principle that a company’s total assets must equal its total liabilities and shareholder equity. Understanding how to read a balance sheet can help you get the most out of the information your accountant, administrator or banker provides and empower you to act.
The first section of a balance sheet is devoted to listing the company’s assets. This section typically includes current assets and long-term assets, as well as the company’s cash on hand and marketable securities. Current assets may include inventory, accounts receivable and short-term investments. Long-term assets can include property, plant and equipment, and intangible assets such as intellectual property and goodwill. The second section of the balance sheet lists the company’s liabilities. This includes all debts, interest payments and other recurrent expenses as well as deferred income taxes. It also includes the value of any outstanding pension and profit-sharing contributions. Finally, the third section of the balance sheet includes the company’s shareholder equity, which is the value of the investors’ ownership stake in the company.
One of the primary uses of a balance sheet is to compare the financial status of two companies at a point in time. This comparison can reveal areas of strength and weakness, as well as give a glimpse into the overall health of the company. The balance sheet also plays a role in calculating many of the most widely used financial ratios.
There are a few blind spots that every investor should be aware of when reviewing a balance sheet. The balance sheet only reports a snapshot of the company’s finances, so it’s important to update it regularly. Additionally, differences in accounting methods can impact the numbers on a balance sheet. For example, depreciation is calculated differently by different companies, so the resulting figures can be inconsistent.
While a balance sheet provides valuable information, it’s not an accurate representation of the company’s actual cash flow or return on investment. A better way to measure these items is by analyzing the company’s income statement and cash flow statements.
The FreshBooks Support Team is not a certified tax or accounting professional, and we cannot offer advice in these areas. Please contact a local expert for guidance in these matters.
Learn more about how to read a balance sheet and other essential accounting topics in the FreshBooks Blog.
The Balance Sheet is a financial report that sums up a company’s assets, liabilities and shareholder’s equity at a given point in time. It’s important to understand the different sections of a balance sheet and how they are linked to each other. The balance sheet is a fundamental tool for any business owner, investor or analyst. Understanding how to read a balance sheet will enable you to make informed financial decisions that lead to long-term success. Bilanz
