How to Read and Analyze Balance Sheet


A balance sheet is the statement of assets, liabilities and capital or money of a business organization at a particular point of time. This details the balance of income and expenditure over the preceding period. If you know how to analyze a balance sheet, you can easily take an account of your present situation. To make and analyze a balance sheet is actually the job of a CA or a chartered accountant, but you can also analyze it yourself following some simple tips that we are mentioning here:-

How to Read and Analyze Balance Sheet

How to Read and Analyze Balance Sheet

1. The Elements That Compose a Balance Sheet:-

Every balance sheet is composed of three elements which include the assets, the liabilities and the equity. An asset is described as the economic source owned by the corporation expected to provide future benefits to it. Liabilities refer to the debts of a corporation and equity refers to the resources that have been invested by the owners of the company. You should make yourself familiar with all these three terms before analyzing a balance sheet.

2. Relationship between an Asset, Liabilities and Equity:-

Assets = Liabilities + Equity. In other words you can simply say that the economic sources of a company are described as a sum total of its debts and resources invested by the owners of a company. This enables a company to have an analysis of its present condition as compared to its old situation.

3. Further division:-

Assets, liabilities, and equity are further divided into sub-types. Talking about the assets, there are two types of assets.

Current Assets:- Current assets serve to be the assets expected to be sold or used up in the near term

Non Current Assets:- Non current assets refer to the assets owned by the company that do not come under the current assets.

Similarly There Are Two Types Of Liabilities.

1. Current Liabilities:- When a liability is expected to be liquidated in the near term, it is called current liability.

2. Non Current Liabilities:- Non current liability refers to the long term liabilities or the ones that company owe creditors with a term greater than one year.

Equity Is Further Subdivided Into Two Types Of Equities:-

1. Retained Earnings:- Retained earnings refers to the total profits ever earned minus all of the money paid to shareholders in the form of dividends

2. Treasury Stock:- Treasury stock refers to the stock which is issued and then subsequently repurchased by the company.

4. The Final Analysis:-

The explanation that we have given to you for various terms related with a balance sheet is just an initial stage of knowledge and in order to learn how to analyze a balance sheet, you will have to make yourself familiar with these terms in a deep and elaborated manner. There are also many other terms like quick ration which is the sum total of cash and marketable securities with receivable accounts divided by current liabilities and similarly there are many other such terms as well as formulas. When you learn all these terms associated with a balance sheet, it becomes a small task for you to analyze a balance sheet.