How To Read A Balance Sheet (Components And Template)
Updated 30 September 2022
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In financial statements, the balance sheet indicates an entity's current financial situation. An entity's balance sheet provides detailed information about its monetary position and stability. You can assess a company's financial health better if you know what a balance sheet includes and its significance. In this article, we discuss how to read a balance sheet, understand why it is important, find out the information it contains and look at a reference template.
How to read a balance sheet
The following technique can help you understand how to read a balance sheet. A balance sheet has two sections: an assets section and liabilities and equity section. Listed on the left are assets sorted by the ease of liquidation, with the more complicated assets ranked below the easier-to-liquidate assets. Right under the liability column, you can find a list of current liabilities, followed by long-term liabilities. To create a balance sheet, it is necessary that these two sections equal each other as follows:
Assets = liabilities + stakeholders' equity
Equalising the two sections is vital; otherwise, a mistake could occur during the calculations, such as forgetting to record a transaction or recording it incorrectly. A business uses its assets, liabilities and shareholders' equity to run its affairs. Here is a step-by-step guide to reading a balance sheet:
1. Establish the reporting date and period
A balance sheet shows a company's assets, liabilities and shareholders' equity at a given point in time. Public companies issue these reports quarterly. As a result, the reporting date is usually the last day of the quarter:
Quarter 1: March 31
Quarter 2: June 30
Quarter 3: September 30
Quarter 4: December 31
Many companies reporting on an annual basis choose the 31st of December as their reporting date, though any date is acceptable. The companies usually complete the balance sheets within a few weeks following the end of the reporting period.
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2. Identify the assets
You can calculate your assets based on your reporting date and time period. The balance sheet contains assets often listed in two different ways: as individual line items and as total assets. Upon separating assets into different lines, analysts can understand what they are and where they came from; final analysis requires totalling all assets. Assets have two categories: current and non-current. Currently held assets and non-current assets are subtotalled and then added together.
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3. Identify the liabilities
In a similar manner, you can identify the liabilities. These are organised into both line items and totals, categorised into current liabilities and noncurrent liabilities. Current liabilities may include due taxes and wages owed to employees whereas noncurrent liabilities include bonds issued by a company and long term lease obligations. In the same way as assets, subtotals and totals are added together.
4. Calculate the shareholders' equity
Shareholders' equity is generally straightforward for companies or organisations held privately by a single owner. Publicly traded companies may have a more complex calculation depending on the type of stock issued. This section of the balance sheet may include the following items: Common stock, preferred stock, retained earnings and treasury stock.
5. Add total liabilities to total shareholder equity and compare them with total assets
Calculating the balance sheet requires comparing total assets with total liabilities plus equity. Combine the liabilities and shareholders' equity and compare them with the total assets. If your balance sheet does not match, you may have a problem with some of the accounting data used. Be sure that your entries are accurate. It is possible that you omitted assets, liabilities, or equity, or that your totals were inaccurate.
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Components of a balance sheet
Any balance sheet includes the following three components:
An asset is a resource that produces positive economic value and belongs to an entity. In the balance sheet of a company, assets are reported as items bought or created to enhance the value of the company. An asset can be classified as current or noncurrent based on its liquidity - the ease with which it can be converted into cash, sold or used directly.
Current assets are assets that can be converted into cash within a year. Examples of current assets include:
Checking the account balance of a company
Short term investments
Cash, stocks and bonds
Long-term assets or non-current assets are those that may take a long time to convert into cash. Typical non-current assets are:
Intellectual property such as patents and trademarks
Equipment and machinery
Land, buildings and vehicles
This displays the amount owed to others by an entity. Any debt a company owes to another party is a liability. Balance sheets display liabilities according to their due dates, like assets. The settlement duration determines whether liability is current or non-current.
Current liabilities refer to liabilities due within one year. Current liabilities are most commonly:
Past-due wages owed to employees
The amount owed to suppliers for purchases made on credit
Long-term liabilities or noncurrent liabilities have a due date more than a year away. Common long-term liabilities include:
Borrowing that does not require to be repaid in full within one year
Bonds issued by the company
Deferred tax liabilities
Long term lease obligations
Owner's or stakeholder's equity
At the time of creating a balance sheet, the company's equity represents the company's assets. Corporations use the term stockholder's equity while sole proprietorships use owner's equity. Among the most common forms of equity are:
Direct investment by business owners
Both private and public stock
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Importance of a balance sheet
Balance sheet analysis can provide valuable insight into a company's performance. Below are five reasons why balance sheets are important:
Investors, creditors and other stakeholders use it to understand an organisations' financial health.
This is a tool used to measure the growth of a company. It is possible to compare balance sheets from different years' balance sheets.
It is a document that is required to obtain a business loan from a bank or investor.
It allows stakeholders to evaluate the organisations' performance and liquidity position.
This tool facilitates the planning of expansion projects and the budgeting of unforeseen expenses.
Balance sheets can reveal how a company gets its funding, whether through profits or debt.
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Balance sheet template
According to the accounting publication format or design, a vertical balance sheet shows all information in a single column, starting with resource or asset details, followed by liability details and ending with investors' value or shareholders' equity details. Details are presented in descending order of liquidity for each of these classes. This is shown inside the highest category of details (for resources or assets) with cash leading to fixed resources (which are less liquid than money) or altruism. In addition, the liabilities category starts with creditor liabilities or accounts payable and usually ends with long-term obligations or debt.
In a vertical balance sheet, the reader can compare the numbers on the financial record for a given period. In assessing the liquidity of a company as of its accounting report or balance sheet date, someone may, for instance, compare its total current resources with its total current liabilities. Given below is a template of the vertical balance sheet:
Company NameBalance Sheet as on XXXXXXXX Amount in rupeesParticulars
Figures as at the end of the current reporting period
Figures as at the end of the previous reporting period
I. EQUITY AND LIABILITIES
1. Shareholders' Funds
a. Share Capital
b. Reserves and Surplus
c. Money Received Against Share Warrants
2. Share Application Money Pending Allotment
3. Non-current Liabilities
a. Long-term Borrowings
b. Deferred Tax Liabilities (Net)
c. Other Long-term Liabilities
d. Long-term Provisions
4. Current Liabilities
a. Short-term Borrowings
b. Trade Payables
c. Other Current Liabilities
d. Short-term Provisions
1. Non-current Assets
a. Fixed Assets
1. Tangible Assets
2. Intangible Assets
3. Capital Work-in-progress
4. Intangible Assets under Development
b. Non-current Investments
c. Deferred Tax Assets (Net)
d. Long-term Loans and Advances
e. Other Non-current Assets
2. Current Assets
a. Current Investments
c. Trade Receivables
d. Cash and Cash Equivalents
e. Short-term Loans and Advances
f. Other Current Assets
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