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How to read a balance sheet

How to read a balance sheet and understand it. A balance sheet is like the holy grail of finances. The best way to read this ever so important document is with the trained eye of a person who is aware of what the document is about. There are several important sections of a balance sheet that are important to the business involved. Therefore, it is necessary to know what all those sections are.

In addition to the different sections, you need to be aware of the vocabulary involved. So lets start with some of the vocabulary you will find in balance sheets almost cryptic details.

Assets: The assets a company or individual has that could be converted easily to cash. This would be cash, securities, accounts receivables, inventory, office equipment, real estate, vehicles, or properties. Some of these assets are either easily converted into cash, and some are long term assets that take more time to turn to cash.

Liquid Assets: These are the assets that can be easily converted into cash. These are short term assets.

Total assets: This is a list of all of the assets listed above, and including good will, inventory etc. These are all grouped together to show what a total liquidation of the company would become.

Liabilities: This is the legal obligation an individual or company has to pay a debt. This can be the cost of a lease for property, utilities, contracts for equipment, vehicles etc. This is the debt that the business owes out.

Short term debt: Short-term debt is the debts that will be paid off in less than one year's time.

Long term debt: This is debt that is to be paid off in over one year. This would be like the cost of a mortgage, or business loan.

Current liabilities: The current liabilities are a total sum of all of the debt a business owes, that will need to be paid within one year.

Share holder's equity: This is the amount of ownership that a person has in the whole of the company. This is the total asset of the company and then minus the total liabilities of the company.

Equity: This is the equity that a company has that has been built up over the years. This is from stock sales and retained earnings.

As you read the balance sheet, you will see what the investors in your business will be looking at. They want to see that the overall current assets are greater than the current liabilities. There should be a comfortable margin in this difference for the investors to feel secure in the advances of additional funds or loan options.

It is best to be conservative when you are looking at the assets by removing the equipment and inventory from the current assets, as these would be necessary for the continuation of the business.

So, to be inline with the investors, that is what you would also want to do. Look at what can be liquidated easily and at little to no harm in the production of the business.

This is how you read a balance sheet in a way that will show you the way that you can walk in the way of the wise. If you want to gain additional knowledge of balance sheets, it is a good idea to take an accounting class or two. You may find this information very informative as a business owner.

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