To know the financial condition of any company and to invest in it, it is very important to understand its balance sheet. Actually, through the balance sheet you can get complete information about the assets, liabilities and shareholders’ equity of the company. This is why it is very important to read and analyze it properly before investing. Let us now tell you what things you should keep in mind while reading the balance sheet of any company.
Important points of balance sheet
To read the balance sheet, you have to pay special attention to some aspects. Like- on the assets of the company. That means all those things which the company has and from which the company can benefit in future. After this, Current Assets. It includes elements like cash, bank deposits, accounts receivable, and inventory. Then comes the turn of non-current assets. This includes assets like land, machinery, buildings and patents.
Then come Liabilities and Equity. In this, information about the liabilities of the company and the capital of the shareholders is given. These are also of two types. Current Liabilities and Non-Current Liabilities. Current Liabilities include those liabilities which have to be repaid within a year. Whereas, Non-Current Liabilities include long term loans and other long term liabilities. After this, attention has to be paid to shareholders’ equity. This includes share capital, reserves and profits earned by the company.
understand in easy language
The balance sheet, also known as the statement of financial position, is an important document showing the financial condition of a company at any given point in time. It is based on a simple equation. Like- Asset = Liability + Shareholder Equity. It contains details of the company’s assets (assets), liabilities (liabilities), and shareholders’ equity (equity). The balance sheet is used when a company needs money from investors, takes out a loan, or meets tax requirements. Shareholders’ equity includes share capital, reserves and surplus. Surplus is the amount where the company’s profit is shown, which can be used to pay dividends.
The liabilities of the company are divided into non-current and current liabilities. Non-current liability is that long-term liability which the company has to repay in the long run. At the same time, current liability is that responsibility which has to be repaid within one year. Long and short term provisions generally include liabilities related to employee facilities. Additionally, deferred tax liability arises due to the difference that occurs in the calculation of depreciation by the accounting and tax departments. Total liabilities are the sum of shareholders’ funds, non-current and current liabilities, which represent the total amount owed by the company to others.
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