Understanding Your Balance Sheet

In a balance sheet, you’ll record your liabilities in the second column, next to your assets. In other words, it records what you own and who owns it – either a third party like a bank or the company and its shareholders . If a business was listed and the share price was higher than the NAV per share, then that would indicate that the market was expecting the organisation to make future profits. Now consider the liquidity ratio, which enables you to work out your organisation’s short term viability. Long-term liability – money which is not due to be repaid within the next year.

Equity includes owner funds contributed, drawings, retained earnings and stocks. These include accounts payable , payroll obligations , interest, customer deposits received, warranties and loans. Understanding a balance sheet is an essential process in running your business, but it’s equally important to take action on your findings. That’s particularly important if you find you have a poor debt position. But the problem is that the current creditor figure also includes non-financing debt – things like taxation (i.e. corporation, VAT or PAYE due to HMRC) and trade creditors. So you need to have a good look through the notes to the accounts to separate these out.

The Cash Flow Statement

When assessing the viability of other companies, whether suppliers or clients, their annual accounts posted on Companies House may not provide a full set of financial reports, only the balance sheet may be available. These may be possible to acquire if your company is entering into a more formal business relationship with the other party and as such would form part of your own due diligence process. The balance sheet is, in essence, a financial statement that provides a snapshot into what a company owns and owes, https://www.globalvillagespace.com/GVS-US/main-features-of-bookkeeping-and-accounting-in-the-real-estate-industry/ as well as the amount that is invested by shareholders. It’s used by businesses – alongside other important financial statements such as the income statement or bank statement – to conduct fundamental analysis or calculating financial ratios. A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a given point in time. It summarises the company’s assets, liabilities, and equity, and is an important tool for assessing the financial health and stability of a company.

A debt-to-equity ratio of around 20% would be considered low, whereas a figure over 100% is high. Each of these accounting terms has a very specific meaning when being used in financial statements and it is essential that you have a clear appreciation of each one. If you want to refresh or clarify your understanding of these terms then download our eBook ‘Accounting Principles’ available from this website.

How to understand financial statements: balance sheet vs profit and loss account

He has also flagged up three key ratios you can work out to help assess the health of a company in which you’re considering making an investment. We asked Tom Stevenson, investment director at Fidelity Worldwide Investment, to explain the basics retail accounting of reading a balance sheet. Assets are listed on the balance sheet at their transaction value, which may be very different from the market value. Business value is calculated not just on the balance sheet figures but many other factors.

•Non-current liabilities refer to amounts that are not due within 12 months, such as loans. For more information about company assets, read our blog on the classification of business assets. Most owner managers profess to understand very little about the balance sheet that appears in their accounts at the end of the year.

Tax

This article is part of our series on reading financial statements, which you’ll be seeing more of over the next few weeks. Watch this space for our Reading a Financial Statement for Dummies guide – coming soon. The P&L items are usually listed in order and divided into operating income and operating expenses.

A positive cash flow from operations is generally seen as favourable, as it indicates that the client has sufficient cash to fund their operations. On the other hand, a lower asset turnover ratio may indicate that a company is not effectively utilising its assets to generate revenue, which could be a cause for concern for investors. This may suggest that the company is not effectively managing its operations or that it is facing challenges in its industry. A higher asset turnover ratio is generally viewed as more favourable, as it indicates that a company is generating more revenue from its assets. This may suggest that the company has efficient operations or is effectively managing its assets to maximise revenue generation. A high ratio could indicate that the company is financing ambitious growth plans.

Breaking Down a Company’s Financial Statements

This is another reason to keep your balance sheet current, as it will help you to understand what is coming into or going out of your business at any time. The assets include everything that the bank owns or is owed, from cash in its vaults, to bank branch buildings in town centres, through to government bonds and various financial products. Loans made by the bank usually account for the largest portion of a bank’s assets. The statement of cash flows explains where an organisation gets its cash and what it spends it on.

• Intellectual property like patents and copyrights are counted as intangible assets, as they are things that are used for the long-term operation of the business.
• Current Liabilities are Liabilities that need to be paid within the short term.
• You can run a balance sheet report from within Sage Business Cloud Accounting so you can answer these questions.
• If the company reinvests its net earnings at the end of the year, these will be considered retained earnings and will be reflected in the balance sheet under shareholders’ equity.
• The balance sheet, in combination with your P&L and cash flow statements, allows you to predict your current financial position more clearly – and take action where it’s needed.
• Business accounting includes managing the books, handling different accounts, and categorizing different transactions.

I agree to receive offers and news about our products and services by email. Email AddressBy submitting this form you agree to receive offers and news about our products and services by email. Long Term Liabilities are therefore anything due for payment after 12 months, for instance a long-term mortgage or bank loan. In the case of Travis Perkins the return on equity in 2013 was 10.5 per cent, not so very different from the 2014 ratio. This is a reflection of the fact that the company has grown over the years by acquiring other builders’ merchants such as Wickes, Toolstation and BSS.