How to read the balance sheet

People who do not know much about finances normally find it hard to read the balance sheet. To them, the balance sheet is just a table with items and amounts of money listed. However, it is not hard to read a balance sheet and you need not possess any financial knowledge to read the balance sheet.

First of all, you should acquaint yourself with the terminology used in a balance sheet. In a balance sheet, you will come across terms that are vaguely similar to everyday use. In order to read a balance sheet fluently, you need to know about assets and liabilities. In balance sheet, there will be current assets and long term assets as well as current liabilities as well as long term liabilities.

In a balance sheet, current assets means the assets of the company which can be liquidated within a year whereas long term assets means those assets that would take more than 5 years to liquidate. Similarly, current liabilities means the debt which needs to be paid within a year while long term liabilities are those claims of the creditors which would take many years to clear the debt.

There is another term known as owner’s equity. In a business, the business and the owner are treated as two different persons. Hence those part of the company’s assets which the owner has claims to are referred to as owner’s equity.

In a balance sheet, there are two sides. On one side, all the assets of the company are listed and on the other side, the liabilities and owner’s equities are listed. While preparing a balance sheet, it should always be kept in mind that the assets of the company should always be equal to liabilities of the company plus owner’s equities. When analyzing a balance sheet for just one financial period, you should see to it that you analyze it vertically.

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