How to read a balance sheet: Explanation and example

If you want to find the value of your business, start by creating a balance sheet. It’s important to understand the purpose of this document, the different parts that are included, and how to read it.

coins spilling out of a jar

What is a balance sheet?

A balance sheet is a financial statement that displays the liabilities, equity, and assets of a business, and thus the organization’s total value.

Essentially it’s a list of what a company owns, what it owes, and how much is invested in it. Along with an income statement and a cash flow statement, a balance sheet helps show the financial health of a company.

A business owner may review a balance sheet to help determine if the company is succeeding. It can also help with financial planning for the organization.

Some parties, such as potential investors and financial institutions, may want to review a balance sheet to see what assets a company has on hand, and how those assets were financed. This can make it clear if a particular company would be a wise investment. External auditors may need to see a balance sheet to make sure that all assets are accounted for and have been legally obtained.

Balance sheet example

Many publicly traded companies post information such as their annual report, income statements, and balance sheets online where anyone can access them. So if you’ve ever wondered what these statements look like for successful companies in your industry, it’s worth doing some research.

But for a more general idea of what a balance sheet might look like, you can see how Costco breaks it down. Notice how they have a detailed balance sheet that lays out categories such as accounts receivable, accounts payable, long-term assets, and more.

It also includes financial details about shareholder equity and both long-term and current liabilities.

While your balance sheet may look very different from Costco’s, it can still be useful to see what large companies are doing financially—even for those who only have a small or medium-sized business.

Balance sheet equation

Balance sheets can be long documents, but the equation they are based on is easy to understand:

balance sheet equation

Total assets include current assets and noncurrent assets; total equity includes share capital and retained earnings; total liabilities includes current liabilities and noncurrent liabilities.

Ever wonder why it’s called a balance sheet? It’s because the two sides of the equation must be balanced by definition: assets will always equal liabilities plus equity.

What goes on a balance sheet?

The balance sheet several different components, and the details may vary from company to company and industry to industry—but all balance sheets should at least list the value of assets, liabilities, and shareholder equity.

Assets

A balance sheet should state the value of all company assets. This includes anything of value in your business, such as:

  • Cash and cash equivalents
  • Accounts receivable
  • Stocks
  • Property, plant, and equipment (PP&E)

Many people find it helpful to list assets in order of liquidity.

Liabilities

Be sure to name the value of all company liabilities. Liabilities describe different kinds of debt and other sums of money that the company owes, including:

  • Short-term debt
  • Long-term debt
  • Accounts payable
  • Deferred tax liabilities
  • Other fixed payment obligations

Shareholder equity

Also known as stockholder equity, this term describes the value of shareholder investments plus retained earnings.

This amount can belong to the shareholders of a publicly traded company, or to the business owners and/or investors of a private company. List the value of all equity in your final balance sheet.

Structure of a balance sheet

A balance sheet template starts with the date that the information is captured. From there, name the different categories and their total value in the following order:

example of a balance sheet
  1. List of assets. You can choose how you want to break out your assets on the balance sheet. You may want to separate out cash and cash equivalents from your other investments and accounts receivable. However you decide to divide up the categories, make sure every asset is accounted for.
  2. Total value of all assets. Add up the value of all assets on a single line for easy reference.
  3. List of current and long-term liabilities. Be sure to list all debt both short and long term and the value of each.
  4. Total value of all liabilities. In addition to the individual liabilities listed, include one line that adds up total liabilities.
  5. Total value of equity. Include all shareholder equity and the total value of this amount.
  6. The value of liabilities + equity. One last bit of arithmetic: add the value of your total liabilities to the amount you listed for equity and give this amount its own line in the statement.

If the value of the total liabilities plus equity is the same as the total value of the assets, the balance sheet is balanced. If the two numbers are different, then there is an error somewhere that needs to be corrected.

Who creates a balance sheet?

For small private businesses, a bookkeeper or even the business owner can handle this task.

Medium-sized private companies will probably need an external accountant to manage balance sheet preparation.

For all publicly traded companies, public accountants will need to prepare a balance sheet through an external audit. This allows for greater accuracy and accountability.

Possible limitations

While it can give a great deal of insight into the financial health of your organization, a balance sheet can’t reveal everything. It’s only a snapshot of business finances—it doesn’t show your business growth (or stagnation), only the value of business assets, liabilities, and equity at one point in time.

Looking at other financial statements, like an income statement and a cash flow statement, can help give you a better understanding of the state of a business.

Despite these limitations, a balance sheet can still be incredibly useful, and it’s worth creating one so potential investors can see what the organization has to offer.

Why is a balance sheet important?

Anyone who needs a snapshot of your debts and assets—whether that’s internal decision makers, potential investors, or financial institutions—can benefit from looking at a company’s balance sheet. It shows what a business owes and what it owns in one easy-to-understand document.

Understanding your balance sheet is an important part of financial planning. Make sure you have Divvy in your corner for all of your business’s big steps—from building credit to streamlining expenses.

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