Understanding Financial Statements

Balance Sheets

Written by Bennet Grill for Gaebler Ventures

Are terms like cash flow, balance sheets, and EBITDA all Latin to you? The second article in this four-part series on understanding financial statements focuses on balance sheet statements.

Keeping track of your company's assets is an essential ingredient to running a successful business.

Understanding Financial Statements Balance Sheets

Keeping track of your company's assets is an essential ingredient to running a successful business.

In the first article, we reviewed the purpose and function of a cash flow statement--it records incoming and outgoing cash in a company. While a cash flow statement looks at infusions of cash over a period of time, a balance sheet records the amount of cash, as well as other assets and liabilities, which a company has at a specified date. For example, while a company's cash flow statement may record transactions that occurred throughout the fiscal year, the balance sheet would reflect the total amount of assets and liabilities at the end of the year.

Most balance sheets begin by listing a company's assets. This can include:

Assets on a balance sheet are often divided into two categories: current assets and noncurrent assets. Current assets include cash and cash equivalents and items the company is expecting to sell; essentially these are liquid assets or easily liquefiable assets. Noncurrent assets are items the company does not expect to make liquid; items such as the building, factory, or machines used to deliver the product.

Next are a company's liabilities, or what a company owes or is going to owe to others. Loans, accounts payable, tax liabilities on assets, and bonds issued are all examples of liabilities. Liabilities are often evaluated based on the date the obligations are due. Current liabilities are often due within one year, while long-term liabilities are due one year or later.

The final part of a balance sheet is called shareholders' equity, which is often listed with the company's liabilities. Shareholders' equity represents the value of the company spread out among all of its shareholders, regardless of the rights attached to each class of stock. From an accounting perspective, shareholders' equity is a company's total assets minus its total liabilities.

Understanding how to create and evaluate a company's balance sheet is an important part of running a successful business. Keeping track of a company's assets and liabilities can be easily done through the use of spreadsheet applications like Microsoft Excel, and will help you as an entrepreneur to keep track of your growing business before you have the need or resources to hire a chief financial officer.

Make sure to read about income statements and cash flow statements on Gaebler.com, as they play an equally important role of measuring a company's performance.

Bennet Grill is a writer who has a passion for business and finance. He is currently an Economics major at Duke University in North Carolina.

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