Financial Statements How to Read and Use Your Balance Sheet
Learn about the components of a company balance sheet - aka the statement of This means that assets, or the means used to operate the company, are For the liabilities side, the accounts are organized from short to well the company can meet its obligations and how the obligations are leveraged. You may find it helpful to consult a glossary of financial terms as you read this This financial statement details your assets, liabilities and equity, as of a Consistent with the equation, the total dollar amount is always the same for each side. With balance sheet data, you can evaluate factors such as your ability to meet. Balance Sheet Equation: Assets = Shareholders' Equity + Liabilities When a large amount of cash is recorded on the balance sheet, it's generally a good sign as it These ratios provide information on how well the company can meet its A current ratio of , meaning there are $ in current assets available for.
Balance Sheet Basics Your balance sheet sometimes called a statement of financial position provides a snapshot of your practice's financial status at a particular point in time. This financial statement details your assets, liabilities and equity, as of a particular date. Although a balance sheet can coincide with any date, it is usually prepared at the end of a reporting period, such as a month, quarter or year.
A sample balance sheet for the fictitious Springfield Psychological Services at December 31, and is presented below, as an example. The layout of a balance sheet reflects the basic accounting equation: Consistent with the equation, the total dollar amount is always the same for each side. In other words, the left and right sides of a balance sheet are always in balance.
Understanding the Balance Sheet
Some balance sheets do not use the left-right format and instead list assets on top, followed by liabilities and then equity. Assets Assets are the things your practice owns that have monetary value.
Your assets include concrete items such as cash, inventory and property and equipment owned, as well as marketable securities investmentsprepaid expenses and money owed to you accounts receivable from payers. Assets also include intangibles of value, like patents or trademarks held.
On a balance sheet, assets are listed in categories, based on how quickly they are expected to be turned into cash, sold or consumed.
Current assets, such as cash, accounts receivable and short-term investments, are listed first on the left-hand side and then totaled, followed by fixed assets, such as building and equipment.
The portion of equipment cost that is estimated to have been used up, based on the equipment's estimated useful life, may be subtracted from fixed assets in the form of accumulated depreciation to calculate net property and equipment.
Understanding the Balance Sheet
Various ways to calculate depreciation can have different tax implications. Current assets include cash, government securities, marketable securities, notes receivable, accounts receivable, inventories, prepaid expenses, and any other item that could be converted to cash in the normal course of business within one year.Classifications of Assets and Liabilities
Current assets should reasonably balance current liabilities. Current assets divided by current liabilities produce one of the "health indicators" of a company, the "Current Ratio. Since inventories are sometimes difficult to turn into cash, the "Acid Test" is another ratio used. Rather than being a ratio, it is a dollar-denominated indicator of a company's health.
Fixed assets include real estate, physical plant, leasehold improvements, equipment from office equipment to heavy operating machineryvehicles, fixtures, and other assets that can reasonably be assumed to have a life expectancy of several years.
In practice most fixed assets—excluding land—will lose value over time in a process called depreciation.
Fixed assets are reported net of depreciation in an attempt to claim only their current value. Fixed assets also include intangibles like the value of trademarks, copyrights, and a difficult category known as "good will. Fixed assets, of course, should be in some reasonable balance with long-term liabilities.
If a company owes more for capital purchases than those purchases are worth on its books, that is an indicator of potential problems. Liabilities Liabilities are the business's obligations to other entities as a result of past transactions. These entities range from employees who have provided work in exchange for salary to investors who have provided loans in exchange for the value of that loan plus interest to other companies who have supplied goods or services in exchange for agreed-upon compensation.
Liabilities are typically divided into two categories: Current Liabilities are due to be paid within a year.
These are the "Assets," "Liabilities" and "Equities" category accounts. For more on building the Balance sheet from accounts and account balances, see the article Trial Balance.
Start with the Basic Equations Both the Income statement and the Balance sheet start with simple equations.
The basic Income statement equation is this: And, they think of credits as additions. Banks, in fact, use these terms on account holder statements.
Debit and Credit Impacts Depend on Account Category Debits and credits, however, have different results on different sides of the Balance sheet.
To accountants, the bank's usage is technically correct. However, this usage is accurate only because banks regard an account holder as a liability account. In double entry accounting: