How to Read a Corporate Balance Sheet
Financial Statements 101:
How to Read and Use Your Rest Sail
by Corporate Relations and Business Strategy Staff
Understanding the different types of financial documents and the information each contains helps you improve understand your financial position and brand more informed decisions most your practise. This article is the first in a series designed to assist yous with making sense of your practice'due south financial statements. In this issue, we start with your balance sheet.
Some practitioners are more familiar with financial terminology than others. You may find it helpful to consult a glossary of financial terms equally you read this article. And though the subject of finances is tedious for many health professionals, it is crucial to be informed and to monitor the financial pulse of your practice.
Residual Sheet Basics
Your remainder canvas (sometimes called a statement of financial position) provides a snapshot of your do's financial status at a item indicate in fourth dimension. This financial statement details your assets, liabilities and disinterestedness, every bit of a particular date. Although a balance sheet tin can coincide with any date, it is usually prepared at the end of a reporting menses, such every bit a month, quarter or year.
A sample residue canvas for the fictitious Springfield Psychological Services at December 31, 2004 and 2003 is presented below, as an case.
The layout of a balance sheet reflects the bones bookkeeping equation:
Assets = Liabilities + Owners' Disinterestedness
with assets listed on the left side and liabilities and disinterestedness detailed on the correct. Consequent with the equation, the full dollar amount is always the aforementioned for each side. In other words, the left and right sides of a rest sheet are always in balance. Note: Some remainder sheets do not use the left-correct format and instead list avails on top, followed by liabilities and then equity.
Avails
Avails are the things your exercise owns that have monetary value. Your assets include concrete items such equally greenbacks, inventory and property and equipment endemic, as well as marketable securities (investments), prepaid expenses and coin owed to y'all (accounts receivable) from payers. Assets too include intangibles of value, like patents or trademarks held.
On a balance sheet, assets are listed in categories, based on how quickly they are expected to exist turned into cash, sold or consumed. Current avails, such as cash, accounts receivable and short-term investments, are listed first on the left-hand side and and so totaled, followed by fixed avails, such every bit building and equipment.
The portion of equipment cost that is estimated to accept been used up, based on the equipment's estimated useful life, may be subtracted from fixed assets in the course of accumulated depreciation to calculate net belongings and equipment. Note: Various ways to calculate depreciation can have unlike tax implications. Talk to your auditor or financial advisor to brand the nearly advisable decisions for your practise.
Finally, full assets are tabulated at the lesser of the avails section of the residue canvass.
Liabilities
Liabilities reverberate all the money your practice owes to others. This includes amounts owed on loans, accounts payable, wages, taxes and other debts. Similar to assets, liabilities are categorized based on their due date, or the timeframe within which you expect to pay them.
Electric current liabilities are more often than not due within a yr of the balance sheet date and are listed at the top of the correct-mitt column and and then totaled, followed by a list of long-term liabilities, those obligations that will not become due for more than than a twelvemonth.
Owners' Disinterestedness
Owners' equity (sometimes called net assets or internet worth) represents the avails that remain afterwards deducting what y'all owe. In simplified terms, information technology is the coin you lot would have left over if you sold your do and all of its assets and paid off everything you owe. Note: Valuing a practice can exist extremely circuitous. Owners' equity does not necessarily represent current market value and therefore should non supervene upon a comprehensive valuation by an expert when because buying or selling an existing practise.
Depending upon the legal construction of your practice, owners' equity may be your ain (sole proprietorship), collective ownership rights (partnership) or stockholder ownership plus the earnings retained past the practice to grow the concern (corporation).
Total liabilities and owners' equity are totaled at the lesser of the right side of the rest sheet.
Remember —the left side of your remainder sheet (assets) must equal the right side (liabilities + owners' equity). If non, cheque your math or talk to your accountant.
Now What?
Your balance sheet also provides some of the information you will demand to calculate the bones financial ratios that tin can assistance you rails the functioning of your practice, place trends and implement strategies to shore upwardly your finances. With remainder sheet data, you tin evaluate factors such every bit your ability to meet financial obligations (electric current ratio, days greenbacks on hand) and how effectively you use credit to finance your operations (debt ratio, debt to equity ratio).
Although the balance sheet represents a moment frozen in time, most balance sheets will also include data from the previous year (or even multiple years) to facilitate comparison and run into how your do is doing over fourth dimension.
Compare the electric current reporting period with previous ones using a percent change analysis. Practice you take more assets? Have you accrued more debt? Invested in equipment and facilities? Are your pressing financial obligations (electric current liabilities) under control? Is the amount that payers owe yous growing? Calculating fiscal ratios and trends tin help you place potential fiscal issues that may not exist obvious.
Data from your balance sail can too be combined with data from other fiscal statements for an even more in-depth understanding of your practice finances. Additional resources for managing your practice finances will appear in future issues of the PracticeUpdate E-Newsletter and on APApractice.org.
Date created: 2005
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How to Read a Corporate Balance Sheet
Source: https://www.apaservices.org/practice/business/finances/balance-sheet