How To Read A Balance Sheet Understanding Financial Statements

balance sheets for dummies

An annual report is a publication that public corporations are required to publish annually to shareholders to describe their operational and financial conditions. Liabilities refer to money a company owes to a debtor, such as outstanding payroll expenses, debt payments, rent and utility, bonds payable, and taxes. Current and non-current assets should both be subtotaled, and then totaled together.

A balance sheet is a financial statement that lists a company’s assets, liabilities, and equity. The purpose of a balance sheet is to provide a summary of the entity’s financial position at a specific point in time. As such, the balance sheet may also be referred to as the statement of financial position. A balance sheet is a comprehensive financial statement that gives a snapshot of a company’s financial standing at a particular moment. A balance sheet covers a company’s assets as defined by its liabilities and shareholder equity.

Current (Short-Term) Liabilities

It also includes an additional category named “Other Assets,” where you can take into account your business’s intangible assets and deposits. Investopedia defines an asset as “Anything of value that can be converted into cash.” In other words, an asset provides economic value to businesses and organizations. However, this credit is a liability, a debt that must be paid back at a later date. We use assets and liabilities as our main terms, so don’t worry too much about keeping the debits and credits straight. These are the financial obligations a company owes to outside parties.

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  • The image below is an example of a comparative balance sheet of Apple, Inc.
  • The asset is carried at fair value on the balance sheet, which means that number is subjective.
  • If you are a shareholder of a company or a potential investor, it is important to understand how the balance sheet is structured, how to read one, and the basics of how to analyze it.
  • Yes, the balance sheet will always balance since the entry for shareholders’ equity will always be the remainder or difference between a company’s total assets and its total liabilities.

Some liabilities are considered off the balance sheet, meaning they do not appear on the balance sheet. The result means that WMT had $1.84 of debt for every dollar of equity value. Lastly, inventory represents the company’s raw materials, work-in-progress goods, and finished goods. Depending on the company, the exact makeup of the inventory account will differ. For example, a manufacturing firm will carry a large number of raw materials, while a retail firm carries none. The makeup of a retailer’s inventory typically consists of goods purchased from manufacturers and wholesalers.

Components of a Balance Sheet

If a business doesn’t release its annual financial report within a few weeks after the close of its fiscal year, you should be alarmed. Your accountant (if you have one) can prepare a balance sheet at any time that you want to know how things stand financially. For most businesses, balance sheets are prepared only at the end of each month, quarter, and year.

Companies that report on an annual basis will often use December 31st as their reporting date, though they can choose any date. These formulas tell investors whether or not they will get a return on the money they invest in your company. For example, if your reporting period is Q1 (January 1 – March 31), your reporting date may be April 1 of the same year. Reports are usually created on an ongoing basis, usually on a quarterly frequency. It can be sold at a later date to raise cash or reserved to repel a hostile takeover.

Non-Current (Long-Term) Liabilities

They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot. As noted above, you can find information about assets, liabilities, balance sheets for dummies and shareholder equity on a company’s balance sheet. The assets should always equal the liabilities and shareholder equity. This means that the balance sheet should always balance, hence the name.

balance sheets for dummies

We’ll cover how to prepare a balance sheet and how it can help you understand your business’s financial situation. Current liabilities are customer prepayments for which your company needs to provide a service, wages, debt payments and more. So after the first year, your personal balance sheet would show your vehicle’s value as $18,000. Enter your name and email in the form below and download the free template now!

List the values of each current and noncurrent asset component from the trial balance account, and add up the total current assets and the total noncurrent assets to calculate the grand total of assets. When you read through your business’s balance sheet, like the balance sheet shown in this figure, you may notice that it doesn’t have a «punch line» like the income statement does. You can’t look at just one item on the balance sheet, murmur an appreciative “ah-ha,” and rush home to watch the game. You have to read the whole thing (sigh) and make comparisons among the items. A balance sheet is always prepared at the close of business on the last day of the profit period. In other words, the balance sheet should be in sync with the income statement.

  • If the company takes $8,000 from investors, its assets will increase by that amount, as will its shareholder equity.
  • They are accounts that lead to the generation of future cash inflows like accounts receivable or are used in the business like property, plant, and equipment (PP&E).
  • Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s capital structure.
  • In this example, Apple’s total assets of $323.8 billion is segregated towards the top of the report.
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  • A balance sheet, along with the income and cash flow statement, is an important tool for investors to gain insight into a company and its operations.

Henrik Mühlbradt

Henrik har testet sykler og utstyr for ulike publikasjoner siden 2006, og er sammen med Morten Iversen blant de mest erfarne sykkeltesterne i Norge. Henrik er opptatt av alle former for sykling, men har en forkjærlighet for terrengsykling og cyclocross. Han har konkurrert på høyt og lavt nivå siden midten av 90-tallet, og han kan fortsatt observeres med nummer på styret i terreng- og cx-ritt.