Balance Sheet Basics

There are only a handful of things you need to know when learning to read a balance sheet. Follow along with Google’s Balance Sheet from its 2014 10-K filing:

1. A balance sheet is a snapshot of your business’s financial health at a single point in time (e.g., December 31st).

2. It’s based on the following equation:

Assets = Liabilities + Stockholder’s Equity

This equation is a tally of your business’s assets and the claims against them (liabilities + stockholder’s equity).

In terms of layout, assets always sit at the top of the balance sheet and below them you will find your company’s liabilities and stockholder’s equity.

An important rule is that the balance sheet must balance. Hence, the name.

3. The assets and liabilities sections are organized by how current the account is.

Assets are classified from most liquid to least liquid. Read: How quickly they can be turned into cash.

Liabilities are organized from short to long-term borrowings and other obligations. Read: How quickly they have to be paid back.

4. The balance sheet is divided into 3 parts.

Assets: What your business owns.

Current assets have a life span of one year or less, which means they can be converted easily into cash. These are customer-related assets such as accounts receivable and inventory. Converting these assets into cash is how you pay your bills.

Non-current assets have a life span of more than a year. These assets are not easily turned into cash or are not expected to be turned into cash within a year. They are the company-related assets you want to keep for the long-term. Think machinery, buildings, land, and patents & copyrights.

Liabilities: What your business owes to outside parties.

Current liabilities are the liabilities that will come due, or must be paid, within one year. It includes accounts payable, income taxes payable, and the annual interest payable on a 5-year loan.

Long-term liabilities are the liabilities that will come due at least one year after the date of the balance sheet. It includes bank debt (on a 5-year loan) or a loan from shareholder.

Stockholder’s Equity: What your business owes to its owners and investors.

It reflects the amount of money invested in the company by its owners and investors plus any of the company’s retained earnings. The Stockholder’s Equity section represents your company’s total net worth.

Originally published at facingthenumbers.com on March 31, 2016.