understanding a balance sheet

Some practitioners are more familiar with financial terminology than others. You may find it helpful to consult a glossary of financial terms as you read this article. And though the subject of finances is tedious for many health professionals, it is crucial to be informed and to monitor the financial pulse of your practice. In the case of our sample Acme Manufacturing’s Balance Sheet, it appears that their financial health is in good standing. However, it would make sense to obtain the previous year’s Balance Sheet to compare any trends that should be addressed in the next fiscal year.

Regularly reviewing your debt-to-equity ratio will help keep you from becoming overleveraged, which can make attracting investors more challenging and financing more costly. The mortgage company wants you to put 20% down, and they’ll finance the remaining 80%. Typically, you break these down into current and long-term liabilities.

What are the major components of a balance sheet?

Balance sheets are typically prepared at the end of set periods (e.g., annually, every quarter). Public companies are required to have a periodic financial statement available to construction bookkeeping the public. On the other hand, private companies do not need to appeal to shareholders. That is why there is no need to have their financial statements published to the public.

understanding a balance sheet

Since all assets are recorded on the balance sheet at the price you paid for them, you have to account for the reduction of their value over time. Because companies invest in assets to fulfill their mission, you must develop an intuitive understanding of what they are. Without this knowledge, it can be challenging to understand the balance sheet and other financial documents that speak to a company’s health. In this example, Apple’s total assets of $323.8 billion is segregated towards the top of the report.

Balance Sheet FAQs

However, if liabilities are more than assets, you need to look more closely at the company’s ability to pay its debt obligations. In large businesses, it can be further segregated into common stock and preferred stock. The total shareholders’ fund is a sum of share capital and reserves & surplus. Since this amount on the balance sheet’s liability side represents the money belonging to shareholders’, this is called the ‘shareholders funds’. The balance sheet provides insights on what the business owns , what the business owes , and how much the business is worth for a particular period of time.

While an asset is something a company owns, a liability is something it owes. Liabilities are financial and legal obligations to pay an amount of money to a debtor, which is why they’re typically tallied as negatives (-) in a balance sheet. Public companies, on the other hand, are required to obtain external audits by public accountants, and must also ensure that their books are kept to a much higher standard. Balance sheets allow the user to get an at-a-glance view of the assets and liabilities of the company.

Business Insights

Companies that report annually, like Tesla, often use December 31st as their reporting date, though they can choose any date. The reporting period ends December 31, 2021, and compares against a similar reporting period from the year prior. Below is an example of a balance sheet of Tesla for 2021 taken from the U.S. Share capital is the value of what investors have invested in the company. Current liabilities refer to the liabilities of the company that are due or must be paid within one year.

  • This will include stock and retained earnings, among other items.
  • Following is a balance sheet for the day after you purchased the building.
  • The revenues of the company in excess of its expenses will go into the shareholder equity account.
  • The liabilities side of the balance sheet details all the liabilities of the company.
  • For Stress-Buster, you’ll want to prepare a monthly balance sheet.