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DataDrivenInvestor
Apr 4
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If you have heard about the balance sheets in various discussions, have heard about it in financial talks with your colleagues, or stock market debates on news channels like CNBC, and just want to understand the basics, this article is for you. Having said that, if you are an expert already, I wouldn’t mind you reading it and giving me any feedback.
The balance sheet arguably is one of the most important financial statements prepared by the company. A balance sheet shows the company’s financial position at a specific point in time.
For reference, here is the balance sheet of amazon that I got from yahoo finance.
While there are a lot of breakdowns or rows you see here, notice 3 key sections, Total Assets, Total liabilities, and Total equity. This will be a part of the balance sheet of any company you look into and understanding that would be a great start.
The Assets are resources that are expected to provide future economic benefits.
Examples of assets are cash, property, equipment, etc
The liabilities and owner’s equity section tell us where the company got the funds to invest in the assets.
Examples of liabilities are loans, money owed to lenders and suppliers, etc.
Examples of Owners equity are the company's stocks and earnings that owners invest in their own company(retained earnings)
It's called an accounting equation as per many articles, it is one of the most important equations to understand.
Assets(A) = Liabilities(L) + Owners Equity(OE)
This equation states that the total assets of a company are equal to the sum of its liabilities and owner’s equity. the balance sheet equation must hold for all financial transactions done by the company. Failure to maintain it could result in errors in financial statements, which could mislead investors and other stakeholders about a company’s financial health.
Hoping this information is a good starting point to get you curious to learn more. Understanding the basics of a balance sheet might help you understand how the company is doing at a high level. Even if you can't analyze the company’s health yet just by looking into it, you might be able to get an idea of what financial gurus on tv channels are talking about when they talk about a company’s performance or at least have smarter conversations with your friends.
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