Updated: Feb 16, 2022
One of the top three most important financial statements that a business owner should know how to read is a balance sheet. A balance sheet is a financial statement that shows a company's assets, liabilities, and owners’ equity at a specific point in time. In other words, it provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders and the equity that the company built. The goal for any company should be to build its equity (value of the business).
Assets – Liabilities = Equity (Assets = Liabilities + Equity)
Assets - The asset section is made up of all the items the company owns. Cash, accounts receivable, inventory, prepaid items, are all examples of current assets. Long term assets are fixed assets such as equipment, buildings, land, etc. You can also have intangible assets, and this can be items like trademarks, patents, copyrights, etc. This is an example of a simple balance sheet, but you can get much more detailed than this.
Liability – Contrary to the assets, this is what your company owes. Current liability will show you your accounts payable and short-term loans (less than one-year terms). Long term liabilities are loans with terms longer than one year. When leveraged correctly, liabilities can help your business go to the next level, but the goal is always to have more assets than liabilities.
Equity - Represents the amount of money that would be returned to a company’s shareholders if all the assets were liquidated and all the company's debt was paid off. In other words, the tangible value of the company. Owners equity can be shown as contributions (money put in) and draw (money taken out). Beneath that, you have retained earnings, which is the accumulated net income that is retained by your company at a particular point of time. A healthy company will continue to build its equity (value).