Have you ever tried to find out the financial situation of a company? One of the first documents you come across is the balance sheet. A balance sheet is very informative if you know how to read it. Here is a simple guide to balance sheet format and analysis.

What is a balance sheet?

A balance sheet is like a company’s report card for financial performance. It lists out a company’s assets and liabilities at a particular point in time. Companies generally prepare it at the end of an accounting period. This may be every year, half-year, or quarter.

Is a balance sheet different from a profit and loss (P&L) account?

A balance sheet expresses a company’s status at a specific time. Meanwhile, a P&L account pertains to an entire period. The latter records the company’s income and expenditure across that period.

Why do you need to know how to read a balance sheet?

If you are planning to invest in a company, you need to know more about the company. This is true even if you are seeking employment in a company. Or, perhaps, you might be thinking of becoming a stakeholder in some way. The company’s financial health is important for you. The balance sheet is a single document that tells you everything you need to know.

Format of balance sheet and profit and loss account

A balance sheet has two heads—assets and liabilities. The totals of the two heads are supposed to match exactly. The two heads in a P&L account are income and expenditure. The difference of the totals of the two heads is the profit (or loss) of the company.

You can get a better idea of the format of balance sheet by having a look at this sample balance sheet:

Balance Sheet of XYZ Ltd on 31 March 2016 in Rs. Crore

Assets

Liabilities

Fixed assets

15

Share capital

15

Current assets

 

Net profit

8

Closing stock

5

Long-term liabilities

5

Sundry debtors

6

Current liabilities

9

Cash and bank

14

Provisions

3

 

 

 

 

Total

40

Total

40

 In this simple balance sheet example, the company has Rs 40 crore worth of assets and liabilities. Since the totals are equal, it is balanced.

How to read a balance sheet

A balance sheet is like a photograph. It represents a company’s finances at a given time. By itself, it does not say much about anything. To analyse a balance sheet, you will need a series of balance sheet ratios.

Quite a few ratios can be derived from a balance sheet. These ratios give potential investors an idea of how healthy the company is. The ratios include the debt-to-equity ratio, the fixed asset turnover ratio, and the acid test or quick ratio. The acid test ratio is the ratio of a company’s liquid assets to its current liabilities. It tells you whether the company can immediately repay all of its current liabilities with the assets in hand.

Now you know quite a bit about a balance sheet. So, you should find it easier to determine whether a company is safe for you to invest in. But be sure to do a risk-return analysis before you actually invest.