Balance Sheet: An Essential Tool for Understanding Business Financial Health

Is the Balance Sheet Different from the Financial Position Statement?

In fact, the Balance Sheet and the Statement of Financial Position mean the same thing. The name has simply changed according to international standards. It was originally called “Balance Sheet” because it emphasizes that both sides of the equation must balance. However, this name does not clearly convey the content and purpose of the document. Therefore, it has been renamed “Statement of Financial Position,” which immediately indicates that this document is used to show the company’s financial status at a specific point in time.

What is a Balance Sheet?

The Balance Sheet is a financial statement prepared to provide an overview of the financial position, showing how much assets the company has and where the funding came from. It helps management, investors, and owners quickly understand the company’s status at a certain period.

Basic Equation

What makes it called a “Balance Sheet” is the fundamental equation:

Assets = Liabilities + Owner’s Equity

Both sides of this equation must always be equal, with no exceptions. Because if the company has assets, they must come from somewhere—either through borrowing (Liabilities) or from owner’s funds (Owner’s Equity).

The 3 Components of the Balance Sheet

1. Assets (Assets) - Resources of the company

Assets refer to resources and items that the company can use to generate income. They are divided into two types:

Current Assets are assets that can be converted into cash quickly, generally within 1 year, such as cash, accounts receivable, inventory, and prepaid expenses.

Non-current Assets are assets that take longer than 1 year to convert into cash or are held for operational purposes, such as land, buildings, machinery, long-term investments, and patents.

2. Liabilities (Liabilities) - What the company owes

Liabilities represent obligations that the company must settle with external parties in the future. They are divided into two types:

Current Liabilities are debts payable within 1 year, such as trade payables, short-term loans, and taxes payable.

Non-current Liabilities are debts with maturity periods longer than 1 year, such as long-term bank loans or bonds payable.

3. Owner’s Equity (Equity) - The true ownership interest

Owner’s equity is calculated as: Assets - Liabilities

It represents what owners and shareholders will retain after settling all debts. It includes two parts:

• Capital: the initial investment by shareholders
• Retained Earnings: profits from operations over the years that have not been distributed; if there are losses, they are called accumulated losses.

Two Formats of Preparing a Balance Sheet

Accounting Format (Accounting Form)

This format displays information similar to a T-account, with assets on the left and liabilities plus owner’s equity on the right. It is the most commonly used format because it is easy to understand.

Steps to prepare:

1. Write a heading including the company name, the word “Balance Sheet,” and the date of preparation.
2. List all asset details on the left side.
3. List all liabilities and owner’s equity details on the right side.
4. Ensure both sides sum to the same total.

Report Format (Report Form)

This format presents data sequentially, showing assets first, followed by liabilities and owner’s equity.

Steps to prepare:

1. Write a heading including the company name, the word “Balance Sheet,” and the date of preparation.
2. List details and total all assets.
3. List details and total all liabilities and owner’s equity.
4. The total liabilities plus owner’s equity must equal the total assets.

Why is it important to study and analyze the Balance Sheet?

Assess Liquidity

By examining current assets and current liabilities, you can assess whether the company can meet its short-term obligations. If current assets significantly exceed current liabilities, it indicates good liquidity.

Assess Profitability Potential

Reviewing accumulated losses or retained earnings can indicate whether the company has a profitable history. If there are accumulated losses from the start, it may signal that the business model is not yet profitable.

Compare with Competitors

The balance sheet can be compared with other companies in the same industry to understand how strong the company’s position is.

Track Changes

Comparing balance sheets over different periods helps identify growth trends or decline in the company’s financial health.

Where can we view a company’s balance sheet?

Those interested in viewing a company’s balance sheet can visit the website Datawarehouse.dbd.go.th, which is a platform that publicly discloses financial statements of various companies.

Steps to find:

1. Go to Datawarehouse.dbd.go.th
2. Select “Legal Entity and Financial Data”
3. Search for the desired company name
4. Navigate to the “Financial Statements” tab
5. Choose the fiscal year, and you can compare with other years or other companies in the industry.

How to read and analyze a balance sheet effectively

Step 1: Get a general understanding

Before diving deep, understand what a balance sheet is and what type of information it shows. It provides an overview of the company’s financial position as of a specific date.

Step 2: Check basic ratios

Calculate simple liquidity ratios, such as Current Ratio = Current Assets ÷ Current Liabilities. If the ratio is 1 or higher, it indicates the ability to meet short-term obligations.

Step 3: Compare with previous years

Observe whether assets, liabilities, and owner’s equity have increased or decreased. Growth in assets generally reflects business expansion.

Step 4: Analyze key components

Pay attention to the largest assets, whether they are mostly current or non-current, and focus on the largest liabilities.

Important warnings when using a balance sheet

Outdated Information

A balance sheet shows the financial position at a specific point in time. If significant events occur after the date of the balance sheet, the information may no longer reflect the current situation.

Reliability of Data

Prepared balance sheets may contain errors or, in worse cases, intentional distortions. Therefore, cross-checking with other documents is necessary.

Economic Environment

Volatile economic conditions, fluctuating exchange rates, or inflation can make year-to-year or company-to-company comparisons unreliable.

Do not rely solely on the balance sheet

In addition to the balance sheet, study the income statement, cash flow statement, and other qualitative information to get a complete picture.

Summary

A Balance Sheet is a crucial document that helps understand a company’s financial position instantly. It shows assets, liabilities, and owner’s equity, with both sides always balancing.

For management, the balance sheet aids in planning and decision-making. For investors, it helps evaluate investment potential and growth prospects. Although it has limitations, careful study and analysis of the balance sheet can lead to more informed and wise decisions.