A balanced sheet is a snapshot of your company’s financial health. It consists of three main elements: assets, liabilities and shareholder’s equity.
Assets include inventory, accounts receivable and PP&E. They’re listed in descending order of liquidity, starting with items that can most quickly be converted to cash. Liabilities include recurring expenses, debt payments and current payments on long-term loans.
Assets
The assets section of a Bilanz reports everything that your company owns or has in its possession, including accounts receivable and inventory. The most liquid assets appear first on the list (those that are easily turned into cash), followed by fixed assets like land and building, production equipment and intangibles, such as intellectual property rights like copyrights or trademarks.
The next largest assets are short-term loans, such as credit card debt and lines of credit, and recurring expenses like rent, utilities and wages, which are filed under accrued expenses. Long-term liabilities are those due more than a year away, such as bond payments and mortgages. The final section of the balance sheet reports the total shareholder’s equity, also called owner’s capital or net worth.
The bottom line is that your company’s assets must always equal its liabilities and shareholders’ equity. Use the balance sheet along with your income statement to analyze ratio trends and performance metrics like rates of return.
Liabilities
Liabilities on the balance sheet include all money your practice owes to others, including accounts payable, wages, taxes and debt payments. They’re categorized according to the time frame within which you expect to pay them. The first category is current liabilities, due within a year, followed by long-term liabilities (balances that won’t become due for more than a year).
A separate section of the balance sheet reports accumulated other comprehensive income, which includes items like the cost of goods sold and depreciation. Another subsection reports share capital, which is the investment made by shareholders in your company. The final section of the balance sheet reports shareholder’s equity, which is your net worth after subtracting all liabilities from total assets. This is based on the formula: Shareholders’ Equity = Common Stock + Retained Earnings – Total Liabilities. Depending on your business structure, this could also include contributions from outside investors and/or donated capital.
Shareholders’ Equity
The value of a company’s assets and liabilities are combined with the shareholders’ (or owners’) equity to yield the net worth of the business. A positive number indicates that a company’s assets exceed its debts, while a negative one indicates the opposite.
The components of shareholders’ equity include share capital, retained earnings and accumulated other comprehensive income. Share capital reflects the par value of common and preferred shares sold by the company, while additional paid-in capital represents the amount above the par value invested by the shareholders.
Retained earnings represent the net income that a company does not distribute to its investors as dividends. Instead, these profits get reinvested into the company to help with growth.
Accumulated other comprehensive income is a summation of gains and losses on the company’s investments, such as those from property and equipment. This account is closed out at the end of each accounting period. Investors should be wary of a company with a negative shareholders’ equity. A negative number indicates that if the company’s assets were liquidated, shareholders would walk away with nothing.
Cash
A balance sheet provides a snapshot of the assets, liabilities and shareholder’s equity in place at one point in time. However, it does not report the changes that occurred during this period. Assets are grouped into current and non-current items, liabilities are classified as either current or long-term and shareholders’ equity is grouped by the par value of each share rather than market price.
The cash group of current assets on a balance sheet includes bank accounts, certificates of deposit and money invested in money market funds. The cash equivalent account on a balance sheet is an additional category that includes investments that can easily be converted into cash, such as marketable securities or short-term debt.
When used in conjunction with the income statement, a balance sheet can help a company assess its risk. For instance, using a calculation like the working capital cycle or the days receivable outstanding ratio, you can gauge how efficiently a business uses its resources and whether it has sufficient liquid assets to meet operating expenses.
