How to Read a Balance Sheet – The Simple Format

Reading a balance sheet is instrumental in understanding the business’s financial position. This particular financial report is a snapshot of a moment in time. It can change dramatically in a minute so understanding the perspective of the report and its respective sections will help you to be better informed.

Current Liabilities Section of the Balance Sheet

The current liabilities section of the balance sheet identifies those amounts due to third parties within the current year.  These include accounts payable, credit card accounts, accrued payroll, taxes, unearned revenue, deposits and those amounts due within one year related to debt instruments.  In general they are listed from the most immediate amounts due to …

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An Explanation of Current Assets

The asset side of the balance sheet is divided into 3 major sections.  They include current assets, fixed assets, and other assets.  Current assets carry the most value to the small business entrepreneur because of the cash conversion aspect.  Cash is the blood that keeps a business alive.  So what are current assets?  How do …

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What is Accrual Accounting?

Accrual accounting is the preferred method of accounting for all business operations.  Any publicly traded company must comply with the principles of accrual accounting.  Small business operations can choose between cash and accrual accounting for their records.  Although cash accounting is the easiest to work with as a small business operation, accrual accounting will provide …

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Completed Contract Method of Accounting in the Construction Industry

The completed contract method of accounting recognizes revenue and the associated costs once the project is complete.  This is one of the two popular accounting methods used in the construction industry.  For residential contractors, the completed contract method has a tax advantage by deferring revenue recognition but is generally not considered the best method of …

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How to Read a Balance Sheet – Equity Section (Simple Format)

The equity section of the balance sheet equals assets minus liabilities.  Traditionally the equity section is referred to as the net worth of the company.  If you were to dispose of all the assets through a sale and pay off liabilities, the money left over would be available for distribution to the shareholders.  The shareholders …

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What is Amortization?

There are three methods of expensing an asset to the income statement.  The most common method is depreciation for fixed assets.  Mining, oil, and natural resource operations use depletion (amount removed versus the estimated volume on hand).  Non-physical assets are expensed to the income statement or profit and loss statement via a method called amortization.  It …

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How to Read a Balance Sheet – Simple Format

Assets

Reading a balance sheet is instrumental in understanding the business’s financial position.  This particular financial report is a snapshot of a moment in time.  It can change dramatically in a minute so understanding the perspective of the report and its respective sections will help you to be better informed. So what is a balance sheet?  …

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