Understanding Financial Statements - part 2

Understanding Financial Statements - part 2

Sunday, August 6, 2023

Do you know how to read your balance sheet?

The Balance Sheet is a snapshot at a single moment in time and it shows you what you own, what you owe and what's left over.

Also known as the Statement of Financial Position, the Balance Sheet shows the underlying health of your business overall.

It is made up of three sections; assets, liabilities and equity and it must always be in balance!

Assets minus liabilities = equity

Assets (what you own)

Assets are things and resources that a business owns. They have current and/or future value and can be measured as a dollar amount.

Examples of assets are your bank accounts, trade debtors (money your clients owe you), fixed assets (eg equipment), inventory, intangible assets & prepayments.

They are generally subdivided into current, (receivable within one year), and non-current assets.

Liabilities (what you owe)

Liabilities are amounts that your business owes, think money you need to pay suppliers for goods and services already received, payroll obligations, a credit card or loan balance and other ATO obligations such as GST.

Liabilities may also include amounts received in advance from clients for services yet to be provided (eg deposits, prepayments or gift voucher sales).

They are generally subdivided into current, (payable within one year), current, (payable within one year), and non-current liabilities.

Equity (net worth)

Equity in accounting is the remaining value of an owner’s interest in a business after subtracting all liabilities from total assets.

Typical equity accounts can include owner contributions and owner drawings plus any retained or current earnings (prior or current year profits).

It's important to note that the balance sheet equity total is not necessarily how much the business is worth at market value. Assets are listed on the balance sheet at their transaction value, which may be very different from the market value. Some assets may be worth more, and others may depreciate in value.

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