The Balance Sheet
What the Balance Sheet tells us
The balance sheet tells us about the Assets (what the company OWNS) and about
the Liabilities (what the company OWES to the outside world).
It also tells us how much the shareholders have invested in their company, whether
by purchasing shares or by re-investing their profits. This is called Capital
and Reserves.
The Assets and Liabilities are of interest to anyone that intends to deal with
the company. Comparisons can be made about the company's short-term financial
position by comparing its short-term assets ("Current Assets") to
its short-term liabilities ("Current Liabilities").
After this, a comparison can be made by comparing total assets to total liabilities,
taking into account the company's short-term and long-term assets and liabilities
together. The 'net worth' of a company (in effect the difference between assets
and liabilities) is a simple way to assess its financial standing.
Some assets and liabilities are 'intangible' because they are not made up of
money or physical assets - one example of this is 'goodwill', which is the difference
between what a purchaser pays for a business and its net worth. Care needs to
be applied to the valuation of such intangibles, and also to some other assets
such as property, where the true value if the asset were sold may be less than
is stated in a company's accounts. The reverse can, of course, also be true.
You can find explanations of all the headings under the Balance Sheet in Glossary
of Terms.
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