How to read a balance sheet

business.gov.au describes the balance sheet as a picture of the financial health of a business at a given moment in time. It lists everything the business owns, its assets, and everything it owes, its liabilities, and from those works out its net assets.

Because it describes one date, a balance sheet is usually prepared for the last day of a month or of the financial year, which in Australia ends on 30 June.

Assets are split into two groups.

• Current assets are cash and assets the business expects to sell, collect or use up within a year, or within its normal operating cycle if that is longer, such as petty cash, money owed by customers, inventory and prepaid expenses. Prepaid expenses are used up as the business receives what it paid for, rather than turning back into cash.
• Non-current assets are the assets the business keeps for longer. The most familiar are fixed assets, which business.gov.au describes as long-term assets the business owns and uses in its operations, such as leasehold, property and land, vehicles, equipment and tools, and furniture and renovations.

Adding the two gives total assets.

• Current liabilities are obligations the business expects to settle in its normal operating cycle or that fall due within 12 months, such as credit cards, accounts payable, interest payable and wages that have been earned but not yet paid.
• Long-term liabilities are due after a year or more, such as loans.

Adding the two gives total liabilities.

Net assets are total assets minus total liabilities. business.gov.au notes they are also known as net worth, owner's equity or shareholders' equity. If net assets grow from one balance sheet to the next, the business has kept more value than it has taken out or lost.

business.gov.au says a balance sheet can help you work out your working capital, the money needed to fund day-to-day operations, and your liquidity, which is how quickly you could pay your current debts.

The usual measure of working capital is current assets minus current liabilities. In the example above that is 18,500.00 minus 9,300.00, or 9,200.00. A positive figure means current assets exceed current liabilities. It does not by itself show that enough cash will be available when each bill falls due.

A single balance sheet is a snapshot. Comparing it with the same date a year earlier shows whether debts are growing faster than assets, whether cash is building up or running down, and whether net assets are rising.

Read it alongside the profit and loss statement, which shows how the business performed over the period, and the cash flow statement, which shows how its cash moved.