A balance sheet is a snapshot of your company’s financial health. It lists assets categorized by convertibility into cash and physical existence, with liabilities and shareholder equity.
It can be used to calculate a variety of ratios, including liquidity and leverage. Different accounting systems and ways of handling depreciation can affect the numbers on a balance sheet.
Assets
A balance sheet is a snapshot of a business at one point in time. Assets are listed on the left and liabilities and shareholders’ equity are listed on the right. The assets are grouped by their level of liquidity, with more liquid accounts such as cash and current investments being listed before more illiquid ones like inventory or property, plant and equipment (PP&E). Some assets may be intangible if they are not being used to generate income, while others might be physical in nature or have long-lived values such as land.
Liabilities are also listed based on their due dates, with current obligations being those payable within the next year, while long-term liabilities include items such as mortgage payments and principal and interest on corporate bonds. The last item listed is Shareholders’ Equity, which includes the amount of capital invested by shareholders in the business plus the company’s retained earnings. The basic equation is Assets = Liabilities + Shareholders’ Equity.
Liabilities
A balance sheet provides a snapshot of what a business owns (assets) and owes (liabilities) at a specific point in time. More liquid accounts like cash and trades payable are listed in the current section before illiquid accounts like Plant, Property, and Equipment and Long-Term Debt are reported in the non-current section.
Liabilities are the money a company owes to outside parties, from creditor payments on invoices to interest on bank loans and bond payments. The balance sheet also includes the company’s depreciation expense, which is a regular cost that decreases assets over time.
The balance sheet reports all of a company’s liabilities and shareholders’ equity at the reporting date. Accounts are categorized as current and non-current to give a clear picture of each category’s liquidity. Long-term debt, for example, has a payment term that exceeds one year and is listed in the non-current section. The final section of a balance sheet is reserved for Shareholder’s Equity, which includes common stock value and retained earnings.
Shareholders’ Equity
The total shareholders’ equity account is a key component of the balance sheet. Located below the assets listing and above the liabilities, it reflects the net worth of a business that is owned by its investors or shareholders. Like all other accounts, it can be arranged in a variety of ways, but the most important thing is that the number always matches the asset numbers (which are listed on one side of the equation and debt numbers on the other).
Common stock, preferred stock, additional paid-in capital, retained earnings, and treasury stock are all reported here. Retained earnings are the cumulative after-tax net income accumulated since the company’s inception, minus any dividends paid out to shareholders. The book value of a share of common stock, which is calculated as the par value plus the number of shares outstanding, is also recorded here. Investors and analysts often use this figure to assess a company’s financial health and liquidity.
Financial Ratios
Financial ratios provide valuable insights into a business’s profitability, operational efficiency, and solvency. They allow business owners to benchmark their performance with competitors, as well as within a given industry. They also help investors and lenders spot potential problem areas.
One common ratio is the quick ratio, which measures a company’s ability to pay off short-term debt with current assets. This ratio only takes cash and cash equivalents into account, so it excludes inventory from the calculation. A good quick ratio is one that is greater than 1, which means that a company’s current assets are enough to cover its current liabilities twice over.
Other important financial ratios include the inventory turnover ratio (sales / inventories) and days sales outstanding (accounts receivable / average collection period). These metrics are easy to calculate and understand, and can help a business owner identify problems early on. It’s also important to track these ratios over time and look for trends that may indicate trouble ahead.Bilanz
