For small companies, reading their balance sheets helps them effectively comprehend their financial position at any given time. If you want a realistic view of what your firm possesses and owes at a certain point in time, you need to look at your stated resources, liabilities, and equity.
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How to Read a Balance Sheet?
It's important to grasp the various components of a balance sheet and what the figures quoted mean for your company's health. A balance sheet may be read in the following ways.
1. Understand Current Assets
These are resources that will be turned into cash in the next year that your company owns. Amounts currently in your possession include:
- Account Receivable: - Bills owing to your company that will be paid shortly, such as past-due invoices.
- Inventory: - Product inventories comprise completed goods, work in progress, as well as raw materials for companies that offer tangible goods
- Cash: - includes cash, cheques, and bank accounts with no restriction.
2. Analyze Non-Current Assets
Non-current liabilities are those that can't or won't be turned into cash in the near future. Intangible and tangible assets both make up non-current assets.
- Tangible Assets: - Involve things like computers, machine equipment, and printers in your list of goods.
- Intangible Assets: - Are non-physical assets like reputation, trademarks, and patents considered not as a physical assets.
In most cases, the value of non-current liabilities on a balance sheet is depreciated over the asset's useful period.
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3. Examine Liabilities
Liabilities are the next thing to learn about when analyzing a balance sheet. When a company has liabilities, it means that someone else has a financial responsibility to pay. There are two kinds of liabilities: contractual and non-contractual.
- Current Liabilities: - Accounts payable, wages, and current payments toward long-term debt are all examples of current short-term obligations that must be paid within the next year.
- Long-Term Liabilities: - Some examples of long-term liabilities involve loans and debts that are outstanding more than a year after the period on the balance sheet.
4. Understand Shareholders Equity
On the balance sheet, you must know what is known as shareholders' equity (or simply equity). The entire net value of a company is referred to as the shareholders' equity. It takes into account the original investment made by the owner in the business.
If a firm retains its net profits at the end of the year and reinvests them in the organization, such maintained profits are recorded as shareholders equity on the balance sheet.
How does a Balance Sheet Work?
There are two sections to a balance sheet. In order for a balance sheet to function, both sides must be equivalent. A balance sheet has two sides, and they are as follows:
- The business’s assets (debited)
- The business’s financial Obligations (credits)
The balance sheet gets its name from the fact that these two components must be equal in value. You may use the basic concept for a balance sheet to guarantee that the two sides of your balance statement are equal:
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