How to understand balance sheets

In every business the main goal is to bring in more money; higher profits. But if you don't have a way to keep track of the money then what good does the money do for you. No budget reports, no financial statements, no nothing. This is where balance sheets come into play. A balance sheet is a report of the resources or assets that a business has. It gives you a view of what the business owns and also what is owned to other outside sources. It is also sometimes referred to as a profit and loss account. Know how to understand one will help you make better financial decisions. Here are some tips on how to understand balance sheets so you can keep your business out of the red.

A balance sheet does three things: It shows you a compiled review of what property (if any) the business owns, how much money it has, and also how much the business owes to others. The main formula behind balance sheets looks like this: assets= liabilities + shareholders' + equity

Knowing your assets is important in understanding a balance sheet. Assets are what the company uses to operate its business. Knowing the types of assets is also important when it comes to business and finance.

• Current Assets. Current assets have a life span of one year or less. They can be converted into cash very easily. Types of current assets are, cash equivalents, accounts receivable and inventory cash. Non-restricted bank accounts and checks can also be included in this category. Accounts receivable are short term obligations owed to the business by the clients, cash equivalents are extremely liquid and are usually found in U.S. Treasuries, and inventory cash represents raw materials usually purchased from manufacturers and wholesalers.


• Non-Current Assets. Non-current assets are ones that cannot be turned into cash easily and have a life span of more than one year. These types of assets can be tangible things such as computers, machinery, or land, but they can also be intangible tings such as patents or copyrights. Although these types of assets are not physical they are the ones that usually make or break a company.

Knowing the different liabilities
If you look at the opposite side of the balance sheet you will see the liabilities. These are the financial obligations a business owes to third parties. There are two basic liabilities:

• Long term liabilities. These are debts and non-debt financial obligations that are usually due after a period of at least a year from the time the balance sheet was made.


• Current liabilities. These are the company's liabilities that will be due or paid within the current year. Current liabilities are a combination of short term borrowings like accounts payables, and long term borrowings like interest payment on a 10+ year loan.

Shareholders' Equity is the initial amount of money that a business has invested. If a company decides to reinvest at the end of the fiscal year then the net earnings will be transferred from the income statement to the balance sheet. This represents the company's total net worth.

The balance sheet is an important tool for investors and company's to understand. The balance sheet is a snap shot at a single period in time of a company's accounts. Its purpose is to give users a good idea of where the company stands financially.