Business Accounting – Brief Overview of How to Read a Balance Sheet
Accountants in Manchester – Business Accounting Basics
A company’s financial standing is reflected in its balance sheet, which reveals the exact status of the company in the current market conditions. This important document is also referred to as a ‘statement of financial position’ and it summarises many of the important details concerning a company.
If you are planning to invest in a small business or become a shareholder, then it is very important you understand the basics of how to read a balance sheet, because it is this report which contains the vital statistics and the precise details of the financial position of a company. A balance sheet generally details the assets, liabilities and the net worth of the company at the end of a particular period. Acquiring knowledge only about a company’s profit is not enough to identify how well it is doing. You need to analyse the balance sheet along with the profit and loss account and the cash flow statement in order to get a better understanding of how well a company is performing.
A balance sheet is structured in such a manner wherein the company’s assets should be equal to the liabilities’ and the shareholder’s equity. This is the equation on which the balance sheet is created. One portion of the balance sheet is entirely dedicated to the company’s assets, which includes current assets and fixed assets, whereas the other portions contain the liabilities and the shareholder’s equity.
Usually the assets are mentioned in the descending order starting with the most liquid one and then the list narrows to the least liquid assets. Basically there are two types of assets, namely current and fixed assets. Current assets have the capability of being converted into cash quickly, within a year or less. Accounts receivables, inventory, cash and cash equivalents are included in the current asset category. Cash equivalents are considered the most safe and easily convertible assets. There are assets which take a longer time, more than a year, to be converted into cash and these ones are referred to as fixed assets. They consist mainly of tangible assets such as buildings, machinery, etc…, and non-tangible assets such as patents, goodwill and copyright.
What a company owes to its creditors and outside parties constitute the liabilities of the business. These liabilities can be further broken down into current liabilities (to be paid in less than 1 year) and long-term liabilities (repayable more than 1 year). Current liabilities include items like trade creditors, whereas long- term liabilities include items like long-term bank loan balances. Lastly, the shareholders equity is the total of all the profit and reserves of a company plus the share capital issued.
A balance sheet basically represents a ‘snap- shot’ of a company’s assets, liabilities and shareholders funds at a point in time. If a balance sheet is positive at end of a period this is generally a good sign and can indicate that a company is financially sound. As stated above, the balance sheet can tell us a lot about a company’s make-up but it should always be read and interpreted along with other financial statements before any important decisions are made.
