Understanding Financial Statements

From the Small Business Administration

The primary financial statements are represented in the balance sheet and income statement. Learn

• Balance Sheet
• Income Statement

BALANCE SHEET

The balance sheet is a snapshot of the company's financial standing at an instant in time. The balance sheet shows the company's financial position, what it owns (assets) and what it owes (liabilities and net worth). The "bottom line" of a balance sheet must always balance (i.e., assets = liabilities + net worth). The individual elements of a balance sheet change from day to day, and reflect the activities of the company. Analyzing how the balance sheet changes over time will reveal important information about the company's business trends.

In this lesson we'll discover how you can monitor your ability to collect revenues, how well you manage your inventory, and even assess your ability to satisfy creditors and stockholders. Liabilities and net worth on the balance sheet represent the company's sources of funds. Liabilities and net worth are composed of creditors and investors who have provided cash or its equivalent to the company in the past. As a source of funds, they enable the company to continue in business or expand operations. If creditors and investors are unhappy and distrustful, the company's chances of survival are limited. Assets, on the other hand, represent the company's use of funds. The company uses cash or other funds provided by the creditor/investor to acquire assets. Assets include all the things of value that are owned by, or due to, the business.