Table of Contents
- 1 How to read your balance sheet?
- 1.1 Understanding current assets:
- 1.2 Analyze non-current assets:
- 1.3 Examine liabilities:
- 1.4 Understanding the shareholder’s equity:
- 2 The Importance of Balance Sheet Template:
- 3 Standard formula:
- 4 Conclusion:
A balance sheet template is a financial written document that shows the financial health of a company or business. This document gives a detailed picture of a company’s assets, responsibilities, and shareholder capital. A balance sheet also emphasizes how each asset is financed whether through debt or equity. In simple words, we can say that it summarizes everything that;
- A company owns
- A company owes
- The amount invested by shareholders
In addition to this, it can also give useful information that can assist you in making sound investment decisions.
How to read your balance sheet?
If you are new in a financial sector then understanding the operations of a balance sheet is important. There are following tips on how to read your balance sheet;
Understanding current assets:
In financial term, current assets contain every item that a company owns. These assets can also be converted into liquid cash within a period of one year. These items include the following;
Accounts receivables are the payments that your customers owe you and within a short duration, are due. They may contain an allowance.
At market price or lower cost, inventory is the goods that your business is ready to sell.
All the debt securities in which a liquid market exists are involved in marketable securities.
Cash and its equivalents:
These involve money at hand and referred as liquid cash and whether be hard cash, treasury, checks, or unrestricted bank accounts.
Analyze non-current assets:
Unlike to current assets, the non-current assets are those that can’t be converted into cash within duration of one year. In other words, we can say that before being changed into cash, they take long. They are classified into two;
Tangible assets are physical assets. They may include machinery, buildings, computers, vehicles, to mention a few.
These are the non-physical assets owned by a company such as goodwill, copywriters, and intellectual property.
When you have read the assets, it is essential to pay attention on the liabilities. In simplest definition, liabilities mean everything that a company owes other parties. Furthermore, liabilities are categorized into two;
Within a period of one year, these are the liabilities that are due.
After the reported date on the balance sheet, these are the liabilities that are due more than one year. These often include the following;
- loans, debts
- deferred tax liability
- the principal on bonds
- pension fund liability
The shareholder’s equity is the next thing after liabilities. It is the total amount of money attributable to the company’s owner. It is also referred as net worth or net asset. Additionally, during company’s formation, the amount that the shareholder invested in it referred as shareholder’s equity.
The Importance of Balance Sheet Template:
A professional balance sheet helps in the following;
- It assists you in understanding how rapidly your customers are paying their bills.
- You can identify the amount of debt your business has in relation to its equity with the help of this document.
- It allows you to identify either or not your short term cash is enhancing or decreasing.
- Bu using balance sheet template, you can identify the average number of days taken to fully sell your inventories.
A balance sheet is categorized into two;
- The debit side
- The credit side
In order to balance with each other, both sides must stay equal each time. There is standard formula to ensure this balance;
Assets = Liabilities + Shareholder equity
In conclusion, a balance sheet template formula is a mandatory financial document for your business either you are a small scale business person or an elite entrepreneur. You should template because they are straightforward and easy to read. They help you a lot in developing a strong foundation for building your business financial statement.