Reading A Balance Sheet

It is your duty as a homemaker to invest wisely for the financial future of your family. As an investor in the stock of the company, you need to know the financial position of the company you own.  If you can read the balance sheet effectively, you will understand whether the investment you have made will generate value for you, as the homemaker, and your family. By checking the balance sheet the you can determine whether the company meets its financial obligations, uses the money already invested in this company wisely; what is the debt position of the company and the total assets of the company purchased with its finance. Balance sheet also helps the investor to have a fairly accurate idea of the company’s future performance.

This financial statement is called "Balance Sheet" because the assets in the left column of the 'balance' sheet must balance the liabilities in the right column. Balance Sheets are presented to investors once a year or can be presented quarterly, half yearly or monthly. The company balance sheet will give you a bird's eye view of the financial health or sickness of the company. All assets and liabilities of the company and the shareholder equity position on the last day of the accounting period will be detailed in the Balance Sheet.  The difference between the assets and liabilities is known as equity or net assets of the company.  It is also known as Net Worth of the company.

The line items or each item in the balance sheet is maintained using a system of accounting known as double entry bookkeeping. 

The components of a Balance Sheet

The equation of the balance sheet is Assets = Liabilities + Shareholder’s Equity. Assets are the resources which give economic benefits for its owners. Asset can be buildings, machinery, patents or copyrights. Liabilities can be any accounts payable, provisions, loans etc and equity can be number of shares issued, to be issues, par value of shares and so on. Listed below are details one can expect to find on the balance sheet of a company.

Assets

Current assets

• inventories
• accounts receivable
• cash and cash equivalents

Prepaid expenses Long-term assets

• property, plant and equipment
• investment property, such as real estate held for investment purposes
• intangible assets
• financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents)
• investments accounted for using the equity method
• biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.

Liabilities

• accounts payable
• provisions for warranties or court decisions
• financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds
• liabilities and assets for current tax
• deferred tax liabilities and deferred tax assets
• minority interest in equity
• issued capital and reserves attributable to equity holders of the parent company

Equity

As explained above the net assets of the company is the result of deducting the value of the liabilities from the value of the assets.  This is also known as Shareholder's equity. On the balance sheet the shareholders equity is often shown in the liabilities side of the balance sheet as they are treated as funds owing to the shareholders.  This part of the balance sheet contains the following line items.

• numbers of shares authorized, issued and fully paid, and issued but not fully paid
• par value of shares
• reconciliation of shares outstanding at the beginning and the end of the period
• description of rights, preferences, and restrictions of shares
• treasury shares, including shares held by subsidiaries and associates
• shares reserved for issuance under options and contracts
• a description of the nature and purpose of each reserve within owners' equity