How to Read a Balance Sheet for Beginners:
What Is a Balance Sheet?
A balance sheet displays:
What a business owns (assets)
✅ Liabilities (what it owes)
✅ The business's owner's claim (equity)
The fundamental formula is
Liabilities + Equity = Assets
We refer to this as the accounting equation. The term "balance sheet"
comes from the requirement that it always balance
Main Parts of a Balance Sheet
Assets: What the Company Owns
1. Current Assets:
Assets are things that the business needs to run.
✅ Current Assets (can be turned into cash in a year):
• Balances in cash and banks
• Stock (raw materials and things for sale)
• Trade Receivables (money customers owe)
• Short-term investments
2. Non-Current Assets:
(kept for more than a year)
• Property, Plant, and Equipment (like factories and computers)
• Goodwill (the value of a brand that comes with a takeover)
• Investments for the long term
Liabilities: What The Company Owes
Liabilities are things that you must do or owe.
Current Debts: (due in less than a year)
• Trade payables (amounts owed to vendors)
• Short-term loans
• Expenses already incurred, such as unpaid salaries
Non-current : debts that are past due by more than a year:
• Long-term loans
• Bonds that must be paid
Equity – Owners’ Claim
Also called shareholders’ Equity. It shows what belongs to the owners AFTER paying
all debts.
Equity includes:
• Share Capital (money invested by shareholders)
• Retained Earnings (profits kept in the business)
• Reserves
FORMULA:
Equity = Assets - Liabilities
An example of a simple balance sheet
Here's a tiny illustration:
Assets ₹ Total
Cash ₹ 10,000
Inventory ₹ 5,000
Machines ₹ 20,000
Total Assets ₹ 35,000
Liabilities & Equity ₹ Amount
Trade Payables ₹3,000
Short-term Loans ₹7,000
Long-term Loans ₹5,000
Share Capital ₹15,000
Retained Earnings ₹5,000
Liabilities + equity ₹ 35,000
Notice how ₹35,000 is equal to both sides? It is known as a balance sheet
Why It's Important to Read a Balance Sheet
✅ aids in determining the financial health of a company
✅ demonstrates the amount of debt the business has
✅ aids in differentiating between strong and weak businesses
✅ Beneficial to traders and investors
✔ Examine the company's debt-to-equity ratio to determine whether it can pay
short-term obligations.
✔ Compare current assets to current liabilities. It's usually safer to have less debt.
years to identify patterns.
Short Summary...!
A balance sheet displays a company's assets, liabilities, and owner ownership.
It's a powerful tool to judge a company's financial health.
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It's a powerful tool to judge a company's financial health.
