Advice on how to decrypt the accounting balance sheet

When you created your business, you identified your capabilities to implement your project. There is no dearth of skills in you, talent too. Yet you have an Achilles heel. Deciphering your company’s balance sheet is far from being part of your strengths. So here are some tips from Dynamics.

What is Balance Sheet?

A balance sheet is an accounting document that summarizes the ownership of a company. This document is divided into two parts. The active part, i.e. fixed assets and current assets, and the passive part which lists shareholders’ equity and debts.

The balance sheet is part of a company’s financial statements in the same way as the income statement and annexures. In other words, it reflects the financial condition of your company. The balance sheet is often compared to a picture of a company’s assets at the end of the financial year. It is mainly used by third parties (banks, customers, shareholders, administration etc.) to know the value of the company and ensure its solvency. It is also used to determine taxable profit. In addition, it can be used by managers to conduct internal analysis. To guarantee the balance sheet’s transparency and veracity, balance sheet figures generally must be certified by an auditor.

Read Balance Sheet Like a Seasoned Accountant

To understand a balance sheet, it is therefore imperative to know and master the two parts (active and passive) that make it up. Once you know how to separate an asset from a liability, this document will hold no secrets for you.

zoom in on active part

In the active part, there is what is called a constant. Fixed assets include all assets that remain permanently in the company. Some of them are depreciable and face an irrecoverable loss of value annually, such as vehicles and computer equipment. Others are non-depreciable such as land or title. These losses of value reduce the value of your company’s assets.

The active portion also includes current assets. These are goods that do not remain permanently in the company and/or that are transformed. Among other things, these are stock, work in progress, accounts receivable, marketable securities and cash.

zoom in on inactive part

The liability portion of the balance sheet includes the equity of the business. These are the long-term resources available to the company, which include capital, reserves and the result for the financial year. They also correspond to the amounts that the partners of the company have as they belong to the latter. It also reads long or short term bank loans such as loans or foreign capital. By short-term debts, we mean debts to suppliers, debts related to taxes and duties, or even debts related to the cost of labor (salaries, social fees, etc.).

It is necessary to compare the received balance. Actually, this is the only way to assess the stability of the company. Long-term balance is obtained by comparing long-term assets and long-term liabilities. Calculating working capital will make it possible to evaluate the financial stability of the company. It corresponds to that part of fixed capital that remains available to finance operations after investment in fixed assets.

Short-term balance, on the other hand, is obtained by comparing current assets and current liabilities, which gives a good idea of ​​the company’s liquidity. The assessment of working capital requirement, that is, the amount of money a company will spend on its manufacturing and will not be able to recover until its customers pay the first invoice, is a reference indicator.

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