This post continues our White Top View Series, Basic Numbers with Part 2 of introducing financial statements for people new to investing, today in Part 2 we discuss the balance sheet.
Links to the four parts of the White Top View Series, Basic Numbers are at the end of this post.
Balance Sheets show me the money!
The balance sheet also gets called a Statement of Financial Position. This is the report for anyone that has shouted “show me the money”! The balance sheet lists asset owned, debt owed and the owners share or equity.
The list of stuff owned always begins with cash and other liquid assets grouped as Current Assets. Current assets are those that are or could be turned into cash within one year.
All other assets appear on list below the Current Assets. Following the Assets, Liabilities or debts owed get listed. As above, where we began with current assets, here we begin with Current Liabilities. Current Liabilities are the debts or obligations due within one year. All the others liabilities follow in the liabilities list below.
The name “balance sheet” comes from the need to always balance the numbers. One side or part equals or balances the other. This is the basic formula:
Assets = Liabilities + equity
When liabilities exceed assets, equity is less than zero. That is insolvency, bankruptcy, toast! Naturally we want to see shareholder equity grow because that is what we own as shareholders. At least in theory.
Balance sheets have dates. The date of the balance sheet is important. It gives the financial picture as of that specific date. Think of it as a financial snapshot. To help our understanding, the numbers from one year ago are also listed for comparison. We can see if things are getting better or worse. Look for changes to get a sense of how things are going in the company you own shares in.
Next in Part 3: Getting to the bottom line – on financial statements we discuss the bottom line!
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Links to the White Top View Series, Basic Numbers