Company balance sheets

Understanding Company Balance Sheets

Concept

  • A company balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.
  • It is divided into two parts — assets, which the company owns, and liabilities and shareholders’ equity, which are essentially what the company owes to others.
  • The balance sheet adheres to the formula: Assets = Liabilities + Shareholders’ Equity.

Assets

  • Assets are classified into current assets and non-current assets.
  • Current assets are those assets which can be converted into cash within one financial year, such as cash, marketable securities, accounts receivable, and inventory.
  • Non-current assets, on the other hand, are long-term investments where the full value will not be realised within the accounting year. These include land, buildings, machinery, or intellectual property.

Liabilities

  • Liabilities, like assets, are divided into current liabilities and non-current liabilities.
  • Current liabilities are debts payable within one financial year, such as accounts payable, short-term loans, and dividends payable.
  • Non-current liabilities are those which are due for a period of more than one year, and include long term loans and bonds payable.

Shareholders’ Equity

  • Shareholders’ equity represents the net value of a company, or how much would be left for shareholders if all assets were sold and all debts repaid. It is calculated as Assets - Liabilities.
  • It primarily comprises share capital (the money a company raised by issuing shares) and retained earnings (the portion of profits not distributed as dividends but kept for reinvestment).

Key Points to Remember

  • A balance sheet is named such because it must always balance according to the formula Assets = Liabilities + Shareholder’s Equity.
  • Together, a company’s balance sheet, income statement, and cash flow statement provide a comprehensive view of its financial health.
  • Assets and liabilities are classified as current if they are expected to be consumed or paid within one year, and non-current otherwise.
  • Regularly studying a company’s balance sheet can provide insights into its financial stability, liquidity, and performance.