How To Read a Balance Sheet

A Balance Sheet shows a company’s position at a certain point in time. It is composed of three sections: Assets, Liabilities, and Equity. Assets represent the things of value that the business owns and has in its possession. It does not matter if you still owe money on it or not. For example, if you purchased a car for your sales person to use to market your business and you have a loan on it. Then the car would be an asset for the value of the car. Liabilities are what the company owes to others – creditors, and taxes for example. So in are example above the loan on the car would be a liability. Equity is the portion of business assets that you own free and clear. If you liquidated the business it would be the amount of money left over after you pay off all debts. The equation is Assets equals Liabilities plus Equity.

 

Assets Liabilities
Cash $9,500 Accounts Payable $21,750
Accounts receivable $20,000 Credit Card $5,250
Equipment $5,000 Long-Term Debt 0
Inventory $15,000 Total Liabilities $27,000
Total Assets $49,500
Equity $22,500

 

ASSETS = LIABILITIES + EQUITY

$49,500 = $27,000 + $22,500

 

The equation is very simple if you think of it this way. All the assets owned by the business falls into one of two categories. They are either owned by a creditor (you took a loan to get them) or you own them. (You paid for them in full). That is all this equation is about.

 

It is important to understand that the Balance Sheet must always balance. In other words both side must be equal.

 

So I hope this helps you understand the balance sheet.

NancyB
 

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