When it comes to conducting business, you need to know how well your finances are doing. One way to check on the financial standing of your company is by keeping an up-to-date balance sheet. Not only will a balance sheet help you understand the financial position of your business, but it may help in bringing on investors by giving them a clearer picture of your company’s net worth. Balance sheets are one of the key components of understanding how well a business is doing, along with the income statement and cash flow statement. These three documents together go hand-in-hand in determining whether a company is sinking or swimming. Whether you’re a business owner, potential investor, or shareholder, it’s important you know what a balance sheet is and how to read one. The sections below will cover what a balance sheet is and how to read one, so you know the financial position of your business at all times.
By looking at this balance sheet example, you can see it is broken into two main sections, with assets listed at the top and liabilities and shareholders’ equity listed on the bottom. Some key takeaways from this balance sheet example include:
- What is a Balance Sheet?
- What is the Purpose of a Balance Sheet?
- How to Read a Balance Sheet
- Balance Sheet Example
What is a Balance Sheet?A balance sheet is a financial statement that documents a company’s assets, liabilities, and shareholders’ equity. A balance sheet shows what a business owns and owes, and can display multiple years so a company can track performance and determine areas in need of growth. It’s also an excellent tool for budgeting for small business because it allows you to look at where your money is going. A balance sheet is divided into two sides. On one side, a company lists its assets, or what they own. On the other side, a company lists its liabilities and shareholders’ equity: a summary of what the company owes. The reason a balance sheet is called a balance sheet is because both sides must (you guessed it) balance each other out. The standard formula for a balance sheet has assets equaling liabilities and shareholders’ equity. The balance sheet adheres to the accounting principle of double-entry bookkeeping, where transactions are documented in two separate accounts. For example, let’s say you own a construction business and purchase a forklift for $15,000. You pay $10,000 upfront and take out a small business loan worth $5,000 to cover the rest of the cost. In this case,
- Your $15,000 forklift will be listed under your assets
- Your $5,000 loan will be listed under your liabilities
- The $10,000 you paid in cash will be listed under shareholders’ equity.
AssetsAssets are any resources a company owns, whether tangible or intangible. There are also different types of assets, such as current assets and non-current assets. Current assets are any assets that can be converted into cash within one year and are typically used to fund current operations, such as paying rent and utilities. Examples of current assets include:
- Cash and cash equivalents, such as currency, money orders, treasury bills, and bonds
- Prepaid expenses, such as purchasing an insurance premium at the beginning of the year
- Inventory, including raw materials, work-in-progress products, and finished products ready to be sold
- Marketable securities, such as stocks and certificates of deposit
- Accounts receivables, such as payments owed by customers for goods and services you provided
- Fixed assets, which are usually used to help a company operate. These include:
- Vehicles such as trucks, company cars, and fleets
- Intangible assets are items that hold value but have no physical presence. These include:
- Copyrighted material
- Branded names
LiabilitiesWhile assets are what your company owns, liabilities are what your company owes. Liabilities can be anything from bills for utilities and rent to the salaries you owe your employees. As with assets, there are current liabilities, which must be paid within a year, and long-term liabilities, that can be paid off after one year. Examples of current liabilities include:
- Accounts payable, which is money you owe to suppliers for items you’ve purchased
- Wages payable, which is the money you owe to your employees
- Overdrafts from withdrawing more money than your bank account holds
- Utilities, such as water, electricity, heating, and air conditioning
- Customer deposits, such as payments made in advance by customers for a product or service
- Medical payable, payments needed for medical plans
- Federal income tax payable
- Sales tax payable
Shareholders’ EquityThe final component of your balance sheet is shareholders’ equity. Shareholders’ equity is money left over after all debts have been paid off. To calculate shareholders’ equity, all you have to do is subtract your total liabilities from your total assets. The remaining value is the amount of money that would be distributed to shareholders who have invested in your company after your business’s assets have been liquidated and debts paid off.
What is the Purpose of a Balance Sheet?Now that you know the components of a balance sheet, you may be asking yourself, “what is the purpose of a balance sheet?” The sole purpose of a balance sheet is to give an insight into a company’s financial standing. This is done by calculating what a company owns in assets, and what a company owes in liabilities, as well as how much money is invested in the company through shareholders’ equity. There’s a significant amount of useful data you can pull from a balance sheet to see how your business is doing. Some key data points a balance sheet can uncover include:
- Debt-to-equity ratio, which can tell investors whether a company is borrowing money at a dangerously high level.
- Paying off obligations, which can be determined by comparing current assets to current liabilities to see whether the company has enough liquidity to pay off short-term debts.
- Efficiency can be analyzed using the balance sheet to the income statement. When analyzing the balance sheet vs income statement, you’ll be able to tell whether your assets are generating enough revenue.
How to Read a Balance SheetNow that you know the purpose of a balance sheet, you need to know how to read it. Reading a balance sheet isn’t as difficult as it sounds — if you can read instructions for screwing in a lightbulb, you can easily learn how to read a balance sheet. While learning the basics of a balance sheet won’t turn you into a seasoned accountant, it can help you understand your company’s financial position. You can also send your balance sheet to bookkeeping services or accounting services, such as Community Tax. Our bookkeeping and accounting professionals will help make sense of your business’s finances, so you can make informed financial decisions to scale your company. A balance sheet is typically divided into two sections, with assets listed on the left or top of the balance sheet and liabilities and shareholders’ equity listed on the right or bottom of the balance sheet. Assets are typically listed based on liquidity, or how fast they can be turned into cash. This means current assets, such as inventory, are listed on the top, while non-current assets, such as property, are listed towards the bottom. Liabilities, on the other hand, are listed based on when they need to be repaid. Debts that need to be repaid within one year are typically listed toward the top as current liabilities, while non-current liabilities such as long-term debts are listed toward the bottom. Shareholders’ equity is listed below the company’s liabilities and depicts how much owners have invested in the company. In the next section, we’ll go over a balance sheet example to put it all together.
Balance Sheet ExampleBelow, we provide a balance sheet example using AMC Theaters balance sheet during Quarter 2 of 2019 that will be used for their annual 10-K statement.
|AMC Theaters Balance Sheet 2019 Q2 YTD Currency Code (in millions): USD|
|Cash and cash equivalents||190.5|
|Assets held for sale||NA|
|Other current assets||160.3|
|Total current assets||590.0|
|Operating right-of-use assets, net||4,798.9|
|Deferred tax asset, net||31.1|
|Other long-term assets||520.4|
|LIABILITIES AND STOCKHOLDERS’ EQUITY|
|Accrued expenses and other liabilities||317.8|
|Deferred revenues and income||369.8|
|Current maturities of corporate borrowings||21.4|
|Current maturities of finance lease liabilities||10.9|
|Current maturities of operating lease liabilities||570.8|
|Current maturities of capital and financing lease obligations||0|
|Total current liabilities||1,713.9|
|Capital and financing lease obligations||NA|
|Finance lease liabilities||109.4|
|Operating lease liabilities||4,852.0|
|Exhibitor services agreement||557.7|
|Deferred tax liability, net||51.7|
|Other long-term liabilities||192.0|
|COMMITMENTS AND CONTINGENCIES|
|Class A common stock (temporary equity)||0|
|Class A common stock||0.5|
|Class B common stock||0.5|
|Additional paid-in capital||2,006.8|
|Accumulated other comprehensive income (loss)||(28.6)|
|Total stockholders’ equity||1,325.1|
|Total liabilities and stockholders’ equity||13,514.9|
- Assets: AMC Theaters’ current assets total $590,000,000, while their non-current assets total $12,924,900,000, bringing their total assets to $13,514,900,000.
- Liabilities and Shareholders’ Equity: AMC Theaters’ current liabilities total $1,713,900,000, while their non-current liabilities total $10,475,900,000, bringing their total liabilities to $12,189,800,000. AMC Theaters’ shareholders’ equity totals $1,325,100,000, bringing their total liabilities and stockholders’ equity to $13,514,900,000
- Balance: AMC Theaters’ assets balances with their liabilities and shareholders’ equity at $13,514,900,000