Financial Statements

Reading the Balance Sheet

Balance Sheet is the primary financial statement. It has got two main headings -Liabilities and Assets.

Balance Sheet

  • Liabilities (Money borrowed by the Business) – Liabilities are sources of funds, or in other words money borrowed by the business. In this case where did the business borrow its money?  (1) First it borrowed its money from owners – Share Capital and then (2) it borrowed money from outsiders –Loan. Sometimes the business will not borrow physical money but will borrow in kind. That gets listed under Current Liabilities. Currently business is liable to pay someone. All the money that is supposed to go out of the business within one financial year get recorded under current liabilities. All the payable, tax, short-term debts everything gets listed under current liabilities.
  • Assets (Uses of Funds) – Assets are the use of funds. Where has the business used the money that it sourced? Where has the business used its money that it borrowed? Most of the times business will spend its money in acquiring Fixed Assets which depreciate – Land, Building, Machinery, office furniture and so on. Then we have something called as Current Assets. Current Assets predominantly have three main things that get listed. (1) Debtors – The money that is supposed to be paid by customers within one financial year. Or in other words the money that is supposed to come in to the business within one financial year. Then we have (2) Inventory – Goods or raw material that can be converted into cash within one financial year. Almost all companies in manufacturing sector will have inventory column, whereas a service sector company may not have an inventory section. And then comes (3) Bank Balance – Money that is in the bank.

This is all you need to know when it comes to Balance Sheet. As the name suggests Balance Sheet should balance. It means the numbers that gets listed on the Liabilities side should match the numbers listed on the Assets side. It will simply tell us how much the business has borrowed and where it has used that money.

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