Financial Lesson: The Balance Sheet
Yesterday we went over the Income Statement, so today we’re going to cover the basics of the Balance Sheet. If you didn’t see yesterdays posts go check it out, but today will be the 2nd major financial document for a company.
So what’s a balance sheet? Well the balance sheet is the financial health document essentially of the company. You use the balance sheet to see how the company is performing over time. There are 3 major sections in a balance sheet:
- Assets
- Liabilities
- Shareholders’ Equity
This document is usually the longest of the 3 since it lists everything involved within the company. Everything the company owns, owes and makes is listed on the balance sheet. It’s also important to understand the key accounting equation of Assets = Liabilities + Shareholders Equity, in other words the total assets should equal the liabilities and shareholders equity combined and be balanced, hence the name.
Assets - The first section of the balance sheet is the assets. This is also subdivided into two major sections; the Current Assets and Non-Current Assets.
The current assets are anything that company will usually be using within a period of a year. This is things like cash, accounts receivable (accounts for customers who pay with credit), inventory, supplies, prepaid expenses, etc. All of these items could theoretically be used up within a year such as the cash on hand or prepaid rent for a year or the inventory the company used for the store. All of the items will change month to month and year to year, hence the name current assets.
Non-current assets on the other hand are items the company owns that lasts longer than a year. This is things like land, vehicles, equipment, building, etc. These items will all last longer than a year and usually will be used by the company for years to come, hence named non-current.
Liabilities - Switching over to liabilities, these are all things the company owes or does not actually own themselves. This is also split up between both current and non-current liabilities
Current liabilities are things the company owes within a year period usually. Things such as accounts payable (what the company owes to another company on credit), taxes payable, short-term loans or debt, etc. All of these items are expected to be paid within the year such as a short-term business loan or the income tax for the year. These once again will change from year-to-year usually.
The non-current liabilities are what the company owes over a longer period of time. Things like a mortgage, notes payable, bonds payable, larger loans, etc. These are all things that must be paid off by the company over more than a year long period.
Shareholders’ Equity - The final main section that you’d see on a balance sheet is the shareholders equity section. This is essentially the actual value of the company because it’s the total assets minus the total liabilities. The two main things you’ll see in this section are the retained earnings (income for the year) and the common stock. The common stock is basically your stock as an investor, it’s how much the total shares are worth from the company. There may be other lines here as well occasionally such as preferred shares if the company issues any, but mainly here you will find the total stock value of the company and their income.
That sums up the main sections you’ll see on the balance sheet. An easy thing to remember is the equation of Assets = Liabilities + Shareholders Equity. To remember each section just think of:
- Assets are what the company OWNS
- Liabilities are what the company OWES
- Shareholders’ Equity is what the investors OWN
Check out my other posts, and as always do your research and happy investing!
