A balance sheet is a snapshot of a company’s assets that reflects its financial standing at the end of an accounting period, generally expressed in the handy formula of assets equal liabilities plus stockholders’ equity. It shows what a company owns and what it owes, all in one document.
Think of it like this: you company pays for all the stuff you own (unless you’re a klepto) by either borrowing money (AKA liabilities) or borrowing it from investors (AKA stockholders’ equity. Say you borrow $500 cash. That means your cash assets just went up to $500 but so did your debt liability, making both sides of the equation equal. Same goes if you take that same money from the investor side of things.
Assets, liabilities and shareholders’ equity are all have lots of smaller accounts within them, the nature of which can vary wildly by industry. However, there are a few things to know about each one.
On the balance sheet, assets are listed in order from how easily they can be converted into cash AKA current assets and those that can’t be converted to cash no matter how hard you try AKA long-term assets.
Here is the general order of accounts within current assets:
Cash: The ultimate liquid asset is, of course, cold hard cash. Other forms of “cash” can be Treasury bills and short-term certificates of deposit.
Marketable securities: Insert equity and debt securities that have a liquid market
Accounts receivable: The money that customers owe you
Inventory: the stuff you’ve got for sale, valued at either cost or market price depending on what’s lower
Prepaid expenses: Stuff that’s already been paid for like insurance, advertising contracts or rent
Long-term assets look like this:
Long-term investments: securities that can’t be liquidated in the next year
Fixed assets: These are the things that help you run your business day to day that you can’t simply “unload” like machinery, equipment, or buildings (unless you’re superman).
Intangible assets: Non-physical but valuable things your company owns such as intellectual property and goodwill (aw, how sweet). These are usually only included on the balance sheet if they are acquired with the company.
Now for the liabilities. This is the less fun part, the money you owe to other people. It’s sort of the same game as assets in that you split them up into current and long-term.
Current liabilities might be:
Current portion of long-term debt
Overall amount you owe to the bank
Rent, tax, utilities
Long-term liabilities are stuff like:
Long-term debt: interest and principal on bonds
Pension fund liability: the money you pay into your employees’ retirement accounts
Deferred tax liability: taxes that have been accrued but will not be paid for another year.
And finally we have shareholders’ equity. You might also hear it called net assets. Basically its the result of what you have minus what you owe. These retained earnings can be invested in growing the company or used to pay off some of the liabilities.
Our recent balance sheet says we’ve got money to burn! But we should probably spend it on something useful for our company instead.