Understanding your balance sheet statement
Knowing how to read your company’s financial documents is important because it gives you a better understanding of the overall financial state of your business, thereby allowing you to make more informed decisions regarding your company’s finances. One such document is the balance sheet statement. Your balance sheet will show you what the financial health of your business is at a single point of time and is generally prepared at the end of the month or at the end of the quarter. The following is a breakdown of how to read the basic balance sheet statement:
The assets listed on your balance sheet refer to anything of value that is controlled by your company – regardless of who actually owns it. Items that are considered assets include cash, office equipment, manufacturing equipment, inventory and even accounts receivables, which represent the customers who owe you money and who haven’t payed what they owe.
Because your assets cover items under your possession and not your ownership, it includes items that you may have financed and are still paying off, such as company vehicles. There are two types of assets that will be listed – current assets and long-term assets. Current assets refer to things like cash, inventory and accounts receivable, while long-term assets refer to equipment, property and investments.
Your liabilities are the debts that your company has to other people or entities. This could include things like the balance on your company credit cards, the payment still owed to your suppliers on 30 or 60-day payment terms or loans that you took out on behalf of the company, such as a small business loan to start the company or the financing obtained for a company vehicle.
The Owner’s Equity
The owner’s equity, also referred to as the shareholder’s equity, refers to the assets that you, the owner and shareholder, would receive after deducting everything you owe. So basically, it would be the assets left over after you sold your company and paid off all of the company’s liabilities. This part of the balance sheet is commonly misunderstood as being how much the business is worth if it were to be sold. Keep in mind, the value of the business is generally greater than the owner’s equity value.
Additionally, you should keep in mind the legal structure of your company. If you have sole proprietorship of your business, then the owner’s equity is your own. This is a bit different if you have a partnership (and therefor, collective ownership rights) or a corporation.
The reason that the balance sheet statement is called the balance sheet statement is because it’s split into two sections that sit side by side. The assets of the business are listed on one side, while the liabilities and the owner’s equity are listed on the other. The equation is that the assets should always total up to equal the total liabilities and the owner’s equity added together.
These are the basics of a balance sheet statement. By knowing how to read your company’s balance sheet statement, you’ll be able to get a better idea of your company’s current financial condition as well as its operational efficiency. Because these financial documents are typically reported every month or every quarter, you’ll also be able to get an idea of whether your company’s financial condition and operational efficiency are improving or declining by comparing current balance sheets to past balance sheets.