Lessons for non accountants!What is a balance sheet statement? How to read it!

A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It presents an overview of a company's assets, liabilities, and shareholders' equity. A balance sheet helps assess a company's financial health and provides insights into its liquidity, solvency, and net worth.

Here's a guide on how to read a balance sheet:

1. Identify the Reporting Date: The balance sheet displays the financial position of the company on a specific date, usually at the end of a reporting period, such as a month, quarter, or year. Note the date to understand when the financial information was recorded.

2. Assets: The balance sheet begins with the assets section, which lists what the company owns. Assets are typically categorized into current assets (expected to be converted into cash within one year) and non-current assets (expected to provide future benefits beyond one year). Common types of assets include cash, accounts receivable, inventory, property, plant, and equipment (PP&E), and investments.

3. Liabilities: Following the assets section, the balance sheet presents the liabilities, which represent what the company owes. Like assets, liabilities are classified as current liabilities (due within one year) and non-current liabilities (due beyond one year). Examples of liabilities include accounts payable, loans, accrued expenses, and long-term debt.

4. Shareholders' Equity: The last section of the balance sheet shows shareholders' equity, also known as owner's equity or net worth. It represents the residual interest in the assets of the company after deducting liabilities. Shareholders' equity includes the initial capital invested by shareholders and any retained earnings generated by the company over time.

5. Balance Sheet Equation: The balance sheet follows the fundamental accounting equation: Assets = Liabilities + Shareholders' Equity. Ensure that the total assets balance with the total liabilities and shareholders' equity. If the equation is not balanced, it may indicate errors in recording or calculation.

6. Ratios and Analysis: Assess key ratios to gain further insights into the company's financial position. For example, the current ratio (current assets divided by current liabilities) measures liquidity, while the debt-to-equity ratio (total debt divided by shareholders' equity) indicates the level of leverage. Ratios provide a way to evaluate the company's ability to meet short-term obligations and its overall financial stability.

7. Compare with Previous Periods and Industry Benchmarks: Compare the current balance sheet with previous periods to identify trends and changes in the company's financial position. Additionally, compare the balance sheet with industry benchmarks or competitors to assess the company's performance and position within the industry.

8. Explanatory Notes: Balance sheets may include explanatory notes that provide additional context and detail about specific accounts or transactions. Review these notes to gain a deeper understanding of significant accounting policies, contingent liabilities, or other relevant information.

Remember that a balance sheet represents a specific point in time and should be evaluated alongside other financial statements, such as the income statement and cash flow statement, to obtain a comprehensive view of the company's financial performance and position.