{"id":4458,"date":"2016-04-04T10:47:30","date_gmt":"2016-04-04T15:47:30","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/business-finances\/reading-a-balance-sheet.html"},"modified":"2024-06-06T04:18:35","modified_gmt":"2024-06-06T09:18:35","slug":"reading-a-balance-sheet","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/business-finances\/reading-a-balance-sheet.html","title":{"rendered":"Reading a Balance Sheet"},"content":{"rendered":"\n
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Reading a Balance Sheet<\/h1>\n
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Created by FindLaw’s team<\/a> of legal writers and editors<\/i><\/p>\n\n | Last updated\n

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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

Balance Sheet Basics <\/h2>\n

A balance sheet<\/a> communicates the state of your business to you and to others, and is key in business valuation and assessing the financial health of your company. The balance sheet uses a standard accounting format<\/a> showing the same categories of assets and liabilities no matter the size or type of business. The reason for this standardization is the ability to compare the financial statements of different companies and to compare the financial strength of your company from quarter to quarter. It is one of a business’s most important decision-making tools.<\/p>\n

Below is a sample balance sheet, with definitions and descriptions of the key elements.<\/p>\n\n
ASSETS<\/b><\/td>\n <\/td>\n <\/td>\n <\/td>\n<\/tr>
Cash<\/td>\n <\/td>\n <\/td>\n100,000<\/td>\n <\/td>\n<\/tr>
Accounts Receivable:<\/td>\n <\/td>\n <\/td>\n <\/td>\n <\/td>\n<\/tr>
     Total<\/td>\n <\/td>\n200,000<\/td>\n <\/td>\n <\/td>\n<\/tr>
     Less reserve for doubtful accounts<\/td>\n <\/td>\n-50,000<\/td>\n <\/td>\n <\/td>\n<\/tr>
     Net receivables<\/td>\n <\/td>\n <\/td>\n150,000<\/td>\n <\/td>\n<\/tr>
Marketable Securities<\/td>\n <\/td>\n <\/td>\n200,000<\/td>\n <\/td>\n<\/tr>
Inventory:<\/td>\n <\/td>\n <\/td>\n <\/td>\n<\/tr>
     Raw materials<\/td>\n <\/td>\n100,000<\/td>\n <\/td>\n <\/td>\n<\/tr>
     Work in progress<\/td>\n <\/td>\n300,000<\/td>\n <\/td>\n <\/td>\n<\/tr>
     Finished goods<\/td>\n <\/td>\n200,000<\/td>\n <\/td>\n <\/td>\n<\/tr>
     Total Inventory<\/td>\n <\/td>\n <\/td>\n600,000<\/td>\n <\/td>\n<\/tr>
Prepaid expenses<\/td>\n <\/td>\n <\/td>\n50,000<\/td>\n <\/td>\n<\/tr>
Fixed assets:<\/td>\n <\/td>\n <\/td>\n <\/td>\n<\/tr>
     Cost<\/td>\n <\/td>\n1,000,000<\/td>\n <\/td>\n <\/td>\n<\/tr>
     Less depreciation taken to date<\/td>\n <\/td>\n-100,000<\/td>\n <\/td>\n <\/td>\n<\/tr>
     Net book fixed asset value<\/td>\n <\/td>\n <\/td>\n900,000<\/td>\n <\/td>\n<\/tr>
Other assets<\/td>\n <\/td>\n <\/td>\n50,000<\/td>\n <\/td>\n<\/tr>
Total assets<\/td>\n <\/td>\n <\/td>\n <\/td>\n2,050,000<\/td>\n<\/tr>
LIABILITIES<\/b><\/td>\n <\/td>\n <\/td>\n <\/td>\n<\/tr>
Current Liabilities:<\/td>\n <\/td>\n <\/td>\n <\/td>\n<\/tr>
     Accounts payable<\/td>\n <\/td>\n250,000<\/td>\n <\/td>\n <\/td>\n<\/tr>
     Notes payable<\/td>\n <\/td>\n350,000<\/td>\n <\/td>\n <\/td>\n<\/tr>
     Accrued expenses<\/td>\n <\/td>\n100,000<\/td>\n <\/td>\n <\/td>\n<\/tr>
     Total Current Liabilities<\/td>\n <\/td>\n <\/td>\n700,000<\/td>\n <\/td>\n<\/tr>
Long-Term Liabilities:<\/td>\n <\/td>\n <\/td>\n <\/td>\n<\/tr>
Mortgages<\/td>\n <\/td>\n <\/td>\n500,000<\/td>\n <\/td>\n<\/tr>
Other liabilities<\/td>\n <\/td>\n <\/td>\n50,000<\/td>\n <\/td>\n<\/tr>
Total liabilities<\/td>\n <\/td>\n <\/td>\n <\/td>\n(1,250,000)<\/td>\n<\/tr>
Net Worth<\/b><\/td>\n <\/td>\n <\/td>\n <\/td>\n800,000<\/td>\n<\/tr><\/tbody><\/table>\n
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Assets<\/h2>\n

In the Assets section, each type of asset is listed. Assets are arranged in order of liquidity–how quickly they can be turned into cash. The goal of the Assets section is to determine the total worth of all the company’s assets.<\/p>\n

Current assets<\/u> include cash<\/a>, accounts receivable, securities, inventory, prepaid expenses, and anything else that can be converted into cash within one year or during the normal course of business.<\/p>\n