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What is a Balance Sheet?
A balance sheet is a financial statement that shows what a company owns and owes at a specific time. It helps investors and managers understand the financial health of a business. The balance sheet formula is based on the accounting equation:
Assets = Liabilities + Equity
A balance sheet has two main parts. One part lists all of a company’s assets. The other part shows the company’s liabilities and shareholders’ equity. This layout makes it easy to see a company’s financial status.
This simple layout helps you understand a company’s financial health.
Balance Sheet Example
In actual financial statements, balance sheets are often shown in a list format. Assets are listed at the top. Below them are liabilities, and at the bottom is equity. Here’s an example:
But you can also change the balance sheet format to a side-by-side layout. This highlights that both sides always balance: Assets = Liabilities + Equity.
Main Parts of a Balance Sheet
Current Assets
Cash and Equivalents
Cash and cash equivalents are the most liquid assets on the balance sheet. This includes actual cash and short-term investments that can be converted into cash within 90 days, such as marketable securities.
Accounts Receivable
Accounts receivable is money owed to the company by customers from sales made on credit. As customers pay, this account decreases and the company’s cash increases.
Inventory
Inventory consists of raw materials, work-in-progress, and finished goods. It’s reported under the cost of goods sold when items are sold.
Non-Current Assets
Property, Plant, and Equipment (PP&E)
PP&E includes tangible assets like land, buildings, and equipment, minus accumulated depreciation. Companies often detail these assets by type.
Intangible Assets
Intangible assets include non-physical items like patents or licenses. Identifiable intangibles can be sold separately, while unidentifiable ones, like brand reputation, cannot.
Current Liabilities
Accounts Payable
Accounts payable represents money owed to suppliers for purchases made on credit. Paying these off reduces both the payable amount and cash.
Current Debt/Notes Payable
These are short-term debts due within a year, such as short-term loans. There are also long-term versions for debts due after a year.
Current Portion of Long-Term Debt
This part of long-term debt must be paid within the next year, like the yearly installment on a multi-year loan.
Non-Current Liabilities
Bonds Payable:
Bonds payable represent long-term debt from bonds issued by the company, amortized over time.
Long-Term Debt
This includes all debts due in more than a year, detailed in the company’s debt schedule, which lists all debts, interest, and repayment plans.
Shareholders’ Equity
Share Capital
Share capital is the money invested by shareholders to fund the company.
Retained Earnings
Retained earnings are the cumulative profits kept in the company after paying dividends. They can be used for reinvestment or to cover future losses.
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How to Analyze a Balance Sheet
Understanding the components of a balance sheet is crucial, but analyzing it provides deeper insights into a company’s financial health. Here are some steps and key ratios to consider:
Current Ratio
The current ratio measures a company’s ability to pay short-term obligations. It is calculated by dividing current assets by current liabilities.
Current Ratio = Current Assets / Current LiabilitiesA ratio above 1 indicates that the company has more short-term assets than short-term liabilities, suggesting good liquidity.
Debt Ratio
The debt ratio indicates the proportion of a company’s assets that are financed by debt. It is calculated by dividing total liabilities by total assets.
Debt Ratio = Total Liabilities / Total AssetsA lower ratio suggests a more financially stable company with less reliance on debt. A debt ratio above 0.6 is typically considered high. For example a ratio of 0.8 means that 80% of the cash needed to buy the assets was borrowed.
Inventory Days
Inventory days measure how long it takes for a company to turn its inventory into sales. It is calculated by dividing the average inventory by the cost of goods sold and multiplying by 365.
Inventory Days = (Average Inventory / Cost of Goods Sold) * 365A lower number indicates efficient inventory management and a quicker turnaround.
Receivable Days
Receivable Days, also called Days Sales Outstanding (DSO) measures the average number of days it takes for a company to collect payment after a sale. It is calculated by dividing accounts receivable by total revenue and multiplying by 365.
Receivable Days = (Average Receivables / Revenue) * 365A lower number indicates that the company collects its receivables quickly.
Payable Days
Payable Days, also called Days Payable Outstanding (DPO) measures the average number of days it takes for a company to pay its suppliers. It is calculated by dividing accounts payable by the cost of goods sold and multiplying by 365.
Payable Days = (Average Accounts Payable / Cost of Goods Sold) * 365A higher DPO indicates that the company takes longer to pay its suppliers, which can be a sign of efficient cash management
Cash Conversion Cycle (CCC)
The CCC measures how long a company takes to convert its investments in inventory and other resources into cash flows from sales. It is calculated by adding inventory days and receivable days, then subtracting payable days.
Cash Conversion = Inventory Days + Receivable Days - Payable DaysA lower CCC indicates a quicker conversion of inventory into cash​.
💡 Ratios are valuable tools, but they must be seen in context to be truly meaningful. Comparing ratios over time for the same company can reveal trends and changes in financial health. Additionally, comparing ratios with those of other companies in the same industry helps to benchmark performance and understand the company’s position in the market.
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Enhance your learning experience by downloading our workbook. Practice the ratios discussed in real-time and master analyzing balance sheets in Excel with a hands-on example. Download the workbook here and start applying what you’ve learned directly in Excel.
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Leila Gharani
Founder of XelPlus and ten-time Microsoft MVP. Leila helps over 500,000 professionals master Excel, Power BI, and data automation through practical, real-world training.
