How to Interpret Balance Sheets

Balance sheets quickly determine your business' net worth.

A balance sheet is responsible for listing liabilities and assets of a business. Liabilities are any bills or transactions that take money from the business, whereas assets are revenue or items of value that bring money into the business. The difference between the total liabilities and assets is known as the company's net worth. A company's net worth can be negative or positive. Interpreting balance sheets allows you to see if your business is operating at a positive net worth, which can quickly determine current success or failure of a business.

Instructions

1. Review the assets listed on the balance sheet. Assets can include the current inventory for a company, accounts receivable (income for the business) and also any cash. Cash can be money that was invested in the business, as well as loans.

2. Look at dates and time frames for trends from which the balance sheet was drafted. Time frames can allow you to see how well the business has performed quarterly, annually or monthly, depending on how often the balance sheet is drafted.

3. Review the liabilities. Liabilities include accounts payable (debts are bills that need to be paid), as well as utilities or other expenses necessary to run the business. For example, your electric bill or office supplies would be a liability.

4. Verify and review the shareholders equity. The shareholders equity is the difference between the total assets and liabilities. If the shareholders equity and balanced statement was generated over an extended amount of time, you can determine how much a business is worth from each time frame. For example, a quarterly balance sheet allows you to determine the net worth over a period of three months.

Tips & Warnings

• The net worth of your balance sheet is only as important as the specific transactions that make up your assets and liabilities, so verify that all the numbers are correct.

References

• Moneychimp: The Balance Sheet