Analyzing or reading a balance sheet sounds like a rather intimidating job best left to bank managers and stock analysts. Here are some key points that should be able to help you read and understand a balance sheet properly. It is important to be familiar with this document as it a very important business tool.
Preparing Financial Statements that are Accurate
The first thing is that, it is necessary to procure accurate statements of finance for a business. This is not a simple task. Most business owners find that a major complaint they have is of incorrect balance sheets. Preparing accurate and precise statements of finance requires a fair amount of accounting knowledge.
How the Balance Sheet is read:
All balance sheets have a few main categories; equity, liabilities and assets. All this is actually very intuitive and logical. Whatever is owned by the business comes under assets. The obligations and debts of the company are included in liabilities, this category basically contains everything the company owes or has to pay. Any residual value is called equity. The liabilities and assets can be further divided into long term and short term categories.
These are a few examples of current assets (short-term): marketable securities, inventory, receivable accounts and cash. A few examples of assets (long term) are: equipment and plant, property, buildings, land, vehicles and equipment. Intangible assets would be trademarks and goodwill.
Current liabilities would be: payable accounts, unearned revenues, accrued wages, payable taxes and interest on loans. Liabilities (long term) would be: bonds payable and notes payable.
Under the equity section we have the following: retained earnings, net earnings and common stock. This section differs as it depends on the organization's legal structure.
A vertical analysis is the best way of doing things if only one period is being discussed. Ratios are of great help while analyzing.