Liabilities refer to money a company owes to a debtor, such as outstanding payroll expenses, debt payments, rent and utility, bonds payable, and taxes. The balance sheet also provides information that can be leveraged to compute rates of return and evaluate capital structure, using the accounting equation: Assets = Liabilities + Owners’ Equity.Īssets are anything a company owns with quantifiable value. It shows its assets, liabilities, and owners’ equity (essentially, what it owes, owns, and the amount invested by shareholders). It allows you to see what resources it has available and how they were financed as of a specific date.
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How to Read a Balance SheetĪ balance sheet conveys the “book value” of a company.
The value of these documents lies in the story they tell when reviewed together. To understand a company’s financial position-both on its own and within its industry-you need to review and analyze several financial statements: balance sheets, income statements, cash flow statements, and annual reports. If you’re new to the world of financial statements, this guide can help you read and understand the information contained in them.įree E-Book: A Manager's Guide to Finance & AccountingĪccess your free e-book today. The effect is an obfuscation of critical information. While accountants and finance specialists are trained to read and understand these documents, many business professionals are not. Armed with this knowledge, investors can better identify promising opportunities while avoiding undue risk, and professionals of all levels can make more strategic business decisions.įinancial statements offer a window into the health of a company, which can be difficult to gauge using other means. An ability to understand the financial health of a company is one of the most vital skills for aspiring investors, entrepreneurs, and managers to develop.
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