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Balance Sheet - How To Read It - Business Value
A balance sheet can be presented in a variety of ways. However, all balance sheets, regardless of structure, have the same line items. If you can read and comprehend one of them, you can read them all.When reading the balance sheet of your business, the higher the owners’ equity, the better. It means your business owns more than it owes. You can use the balance sheet to assess your business’ equity in a specific moment, but you can also compare year-over-year changes to assets and liabilities to see how and why your business value has changed over time.Let me give you a few examples, to make things more comprehensible.We assume, in 2022, your business’ assets increased by $20000, from $190000 to $210000. Also in 2022, your business paid off a loan, reducing its liabilities by $10000, from $85000 down to $75000. Previously, the owner’ equity would’ve been $105000 ($190000 less $85000). The new equity would be $135000. We see an increase of $30000—helped by a growth in assets and a reduction in liabilities.We suppose, in 2022, your business’ assets decreased by $9000, from $160000 to $151000. Also in 2022, your business paid off a loan, reducing its liabilities by $5000, from $26000 down to $21000. Previously, the owners’ equity would’ve been $134000. The new equity would be $130000. We see a decrease of $4000 — helped by a decrease in assets that is greater than the reduction in liabilities.Let's walk through one more example.We suggest, in 2022, your business’ assets decreased by $9000, from $160000 to $151000. Also in 2022, your business paid off a loan, reducing its liabilities by $9000, from $26000 down to $17000. Previously, the owners’ equity would’ve been $134000. The new equity would also be $134000. We see that the value of your business would stay the same because the assets increase and liabilities decrease with the same amount.You see what valuable information you can extract from your balance sheet even if you are not a financial expel expert. Having the skills to read and understand your business’ balance sheet will help you a lot when making decisions.
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By Viktoria NedelchevaA balance sheet can be presented in a variety of ways. However, all balance sheets, regardless of structure, have the same line items. If you can read and comprehend one of them, you can read them all.When reading the balance sheet of your business, the higher the owners’ equity, the better. It means your business owns more than it owes. You can use the balance sheet to assess your business’ equity in a specific moment, but you can also compare year-over-year changes to assets and liabilities to see how and why your business value has changed over time.Let me give you a few examples, to make things more comprehensible.We assume, in 2022, your business’ assets increased by $20000, from $190000 to $210000. Also in 2022, your business paid off a loan, reducing its liabilities by $10000, from $85000 down to $75000. Previously, the owner’ equity would’ve been $105000 ($190000 less $85000). The new equity would be $135000. We see an increase of $30000—helped by a growth in assets and a reduction in liabilities.We suppose, in 2022, your business’ assets decreased by $9000, from $160000 to $151000. Also in 2022, your business paid off a loan, reducing its liabilities by $5000, from $26000 down to $21000. Previously, the owners’ equity would’ve been $134000. The new equity would be $130000. We see a decrease of $4000 — helped by a decrease in assets that is greater than the reduction in liabilities.Let's walk through one more example.We suggest, in 2022, your business’ assets decreased by $9000, from $160000 to $151000. Also in 2022, your business paid off a loan, reducing its liabilities by $9000, from $26000 down to $17000. Previously, the owners’ equity would’ve been $134000. The new equity would also be $134000. We see that the value of your business would stay the same because the assets increase and liabilities decrease with the same amount.You see what valuable information you can extract from your balance sheet even if you are not a financial expel expert. Having the skills to read and understand your business’ balance sheet will help you a lot when making decisions.