Most business owners know that the company’s balance sheet (Also see Introduction of Balance Sheet) is one of the most vital financial statements to them because it is very helpful in revealing their company’s financial position. However, after they received the balance sheet from the bookkeeping firm in Singapore have generated for them, not all of them know how they should analyse the balance sheet. So, in the article below, we are going to provide you with some insights on some particulars that you will always see in your balance sheet to ease the process of you reading and understanding it.
To understand the balance sheet of your company, the first thing that you need to know is the accounting equation (Also see Applying the Accounting Equation in Various Businesses). This equation states that the total asset that a company owns is the same as the sum of its liability and equity. Then, you need to know the classification of assets, liabilities, as well as shareholder’s equity of your company. Knowing these will be very helpful for you to understand the financial position of your company thoroughly.
The first section of the balance sheet that we are going to discuss here is the assets section. Assets are the things owned by the company or anything that satisfies the characteristics of probable, benefit, future and economical. One may categorise the assets into two different groups, which are current assets and non-current assets (Also see Guide to Non-current Asset). Current assets include cash, inventory, accounts receivable, accrued income, prepaid expenses as well as marketable securities. On the other hand, some examples of non-current assets are property, plant and equipment, deferred income taxes, as well as other intangible assets.
The liabilities of a company refer to the money that the company owes to the outsiders. In general, most business owners will use leverage to increase their profit margin. The term leverage means the amount of debt that the company uses in financing its assets. By doing so, the operation of the business will not only rely on the funds that the owners have injected. One may also divide the liabilities into current liabilities and non-current liabilities. The accounts payable, part of the long-term debts that need to be paid within the current year, as well as other accruals, fall under the category of current liabilities. In contrast, non-current liabilities are those that the company should pay after a year.
Lastly, the equity (Also see Accounting – Equity and Liabilities) is the amount of funds that the business owners or shareholders have injected into the business. Among the items listed as equity, the paid-up capital and retained earnings are the two most important things that business owners should look at. The paid-up capital is the part that makes up the company’s core capital. In large corporations, paid-up capital may be separated into preferred stock and common stock. Contrarily, the retained earnings are the amount of income that the owners have reinvested into the business rather than taking them out as a dividend.
Understanding the balance sheet is a skill that every business owner should equip themselves with because this enables them to stay on top of the financials of their business. Apart from the balance sheet, the profit and loss statement, as well as the statement of cash flow, are two other important financial statements. Hence, business owners should read the balance sheet together with them to get a comprehensive view of their company’s financial position.