Balance Sheet Analysis
A business’s balance sheet is a formal document that provides an in-depth look into standard accounting practices. The primary categories that are shown for any business type are its assets and liabilities, giving a quick snapshot of what the business’s net worth is at the time. A business’s balance sheet is also considered by many to reflect its overall state of health.
Balance sheets are created in cycles; a month-end, quarter-end or annually. The frequency of the balance sheet creation will be dependent on the type of business and the accounting practices utilized. Most business owners select to have this information compiled monthly as they consider it to be an important tool in their decision making process. Not only can a business owner use the present balance sheet to make future decisions, they can compare the balance sheet analysis they did from prior periods so they can observe trends.
How to Prepare a Balance Sheet
The most important features of a balance sheet are the accurate depiction of the business’s assets and liabilities. Under the assets section of the balance sheet, current assets, long-term assets and other assets will be listed.
Current Assets- cash, accounts receivable, prepaid expenses, stocks and bonds, inventory; anything that can be easily converted into cash should be listed as a current asset
Fixed Assets- Fixed assets are those that can be easily converted into revenues and they are not for resale. The most commonly depicted fixed assets include: furniture and fixtures, vehicles, buildings, land, land and leasehold improvements, machinery and equipment. When they are listed, they are shown at their original cost value less any applicable depreciation.
When you prepare the liability section of the balance sheet, they will be separated into two categories; current liabilities and long-term liabilities. They will be listed in the order of time frame to be repaid.
Current Liabilities- Current liabilities include any debts that must be repaid within 1-year of the date of the balance sheet and can include accounts payable, accrued expenses, notes payable, taxes payable and any other debts or portions of debt that must be repaid within 1-year.
Long-Term Liabilities- Long-term liabilities include any debts that must be repaid in a time frame that is longer than 1-year. Most often these liabilities include property notes, mortgages, start up loans and expansion capital.
When reviewing the information on a balance sheet, one of the most useful calculations is that of the current ratio, considered to be a measure of a business’s financial strength. Current ratio is determined by dividing the business’s current liabilities by the business’s total current assets.