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Accounting / Bookkeeping Basics: Balance Sheets

A balance sheet is going to show the assets of the company, the liabilities of the company, and the net worth, or the owner’s equity. The balance sheet will work along with the other financial documents that we have talked about in order to show a complete picture of the  financial state of that company. If you hold onto stocks of that company, it is a good idea to understand more about the balance sheet, such as how it is structured, the best ways to look over and understand the sheet, and even tips for reading through the balance sheet.

How Can I Use This Financial Document?
The balance sheet is going to be split up into two parts. These two parts are going to be based on an equation, and they must either end up equaling each other or coming out so that they are balanced, or something is wrong with your numbers. The formula that is needed to work with the balance sheet will include:
Assets = Liabilities + Shareholder’s Equity

What all this means is that all the assets, or the money used to operate the company, need to be balanced out by the financial obligations of the company, along with any of the equity investment that comes back to that company, and then they will be known as that company’s retained earnings.
The assets are important because they are what the company will use in order to operate the business. The equity and the liabilities are going to be what will support those assets. The owner’s equity, which can be known as the shareholder’s equity, if the company is publicly traded, will include any of the money that the shareholders invested in that company. It can also include any retained earnings as well. This is important because it is going to represent the funding sources for that particular business.
One way that the balance sheet is different than the income statement we talked about before is that the balance sheet we talked about earlier is more of a snapshot that showcases the financial position of that company right then and there. If the accountant does this financial document on May 21, 2023, then the balance sheet will show where the company is on that date. It won’t cover February 21 to May 21. It just shows May 21.

The Balance Sheet For The Securities And Exchange Commission
Just like the bank wants you to put together a balance sheet to take a look at whether they think you can do well with any credit they offer, the government is going to require that any company that is traded publicly will put together a balance sheet, usually each quarter, to  show to their shareholders.
This balance sheet can be important because it will allow all potential and current investors to see a good snapshot of the finances of that company. In addition to some other things, the balance sheet is going to show you all the value of the stuff that the company owns, right down to the office supplies that the employees use, the amount of debt that the company is taking care of right now, and how much inventory is in the warehouse. It can even tell the investors about how much money the business will have available to work with through the short-term.
This balance statement is going to be one of the first financial statements that you should analyze when you want to see the value of the company. Before you can learn how to analyze this balance sheet, it is important to know how it is structured.
Before we get into this too much though, you need to understand that the limited partnership, limited liability Company, and the corporation balance sheets are going to be a lot different from the regular household balance sheet. This is mainly because these companies have a lot of complex items in their accounting records to keep the company going. This is why many of these companies rely on an accountant to help them get it done.
Businesses are often faced with many difficult questions that others may not know the answers to, such as how to depreciate out the costs for some of their business expenses, how to record the lease obligations, how to account for the expenses of construction at the power plan, and so much more.
No matter how overwhelming it can seem in the beginning to figure out all the different parts of the balance sheet, it is actually pretty simple once you have looked at a few. The best way to get through the balance sheet is to remember that the purpose of this financial statement is to answer three basic questions for anyone who is looking at that sheet. These three main questions that the balance sheet should answer include:

1. What does the company have? These will be the assets of the company.
2. What does the company owe on? These will be the liabilities of the company.
3. What is left over for the owners of that business if they were to pay off all their debts? This one is going to be the shareholder equity or  the book value.

These are pretty advanced terms and fancy words, but they are there to help give the investor a good idea of where the business is at that time. If you can remember the objective of the balance sheet, all those fancy words and accounting complexities won’t seem as overwhelming when you take a look over it later.
One thing to remember is that unlike some of the other financial statements, the balance sheet is not going to cover a range of dates. The information that is present in the balance sheet is going to be good as of the date that is on the balance sheet, but it won’t be able to tell you any date ranges in the process. If you are looking to deal with this issue when calculating many of the accounting ratios, then the best way to do this is to work with the averagely weighted figures of the balance sheet.
An example of this is if you would like to figure out what the average value of inventory was for that year for the company. You would be able to do this by taking the value of the inventory at the previous yearend, add it to the inventory’s value at the end of this year, and then divide them by two.
This is a quick trick that will help you to avoid any distortions by ending period figures that may or may not be able to accurately reflect what occurred throughout that year. For example, if the manufacturing business was able to pay off all the debt it had in the year and this showed that there was $0 in liabilities on this balance sheet, but then there was a line there to show the interest expense on your income statement, this could be confusing.
By taking the time to weigh the average debt outstanding from the balance sheet over that same period, you may be able to get a better idea of what the business has going on here and why they listed some interest costs on the income statement but not on the balance sheet.