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Financial Statement Series: Balance Sheet, Part 6, Balance Sheet Overview
- Rylan Kaliel
- Apr 25
- 5 min read
Updated: Jun 20
Dear readers, we are coming to the end of our discussion on the Balance Sheet. In this blog we will do a very brief overview of the components of the Balance Sheet and talk about how a typical one is set up and what is the use of the Balance Sheet.
The Current Portion of the Balance Sheet
Current assets
These are assets that you expect to use or sell within a year. In other words these are your most liquid assets. They include but are not limited to:
Cash
Account receivables
Inventory
Short term investments
Feel free to revisit our blog on current assets for more information.
Current liabilities
These are liabilities that you must pay within a year. In other words these are the immediate debts you need to worry about. They include but are not limited to:
Accounts payable
Taxes payable
Notes payable
Bonus payable
Feel free to revisit our blog on current liabilities for more information.
Long-term Portion of Balance Sheet
Capital assets
The assets in this section are ones you expect to hold for longer that a one-year period. They are assets you use to build and grow your business. The following are some examples of the typical assets you see in this segment.
Vehicles and equipment
Office furniture
Hardware and electronics
Lease hold improvements
Long term investment
Software
Feel free to revisit our blog on long-term assets for more information.
Long-term liabilities
The liabilities in this group are the ones that don’t need to be paid within a year. This group usually represent the money you borrowed to pay for your long-term assets. The following are some examples of the typical assets you see in this segment.
Notes payable
Loans (including mortgages)
Capital leases
Feel free to revisit our blog on long-term liabilities for more information.
Equity
Equity represents the ownerships contributions and withdrawals from the business. The typical equity section of the Balance Sheet for a sole proprietor includes the following accounts:
Owner’s capital
Owner’s drawings
Retained earnings
Feel free to revisit our blog on equity for more information.
Fundamentals of the Balance Sheet
Before we look at an example of a Balance Sheet we need to discuss three fundamentals of the Balance Sheet.
The Balance Sheet shows the value of the assets, liabilities, and equity at a specific point in time.
The sum of the current and long-term assets must equal the sum of all the liabilities and equity.
The Balance Sheet will generally show comparatives between two periods. What this means is it will show you the numbers for the specific date you have selected, as well as the numbers for the exact same date from the previous period (i.e., December 31, 2024 and December 31, 2023).
Balance Sheet Example
You can see an example of a typical Balance Sheet for a small business below.
Please note that Balance Sheets will defer from business to business as their business needs and make up would be different from each other.
The Balance Sheet below shows the balances as at December 31, 2024, and includes the comparative numbers from December 31, 2023, for comparison. This allows the user to see the changes that have take place within the two periods. For example, you can see that the cash balance has decreased between the two periods, this could be the result of investing more in assets, paying more debt, having higher account receivable balances and so forth.
It is important to look at the Balance Sheet often to gain insight into the health of the business in the section below we have included the most common ratios used by businesses and business partners such as banks and investors to gauge the health of the business.
Balance Sheet Ratios
In this section we will discuss the common ratios business’s use on their Balance Sheet to analyze the health of the business.
Current Ratio
Definition: Measures a company's ability to pay its short-term obligations with its short-term assets.
Formula: Current Assets / Current Liabilities
Example:
Current Assets: $120,964
Current Liabilities: $35,723
Current Ratio = $120,964 / $35,723 = 3.39
Interpretation: The business has $3.39 in current assets for every $1 of current liabilities.
Quick Ratio (Acid-Test Ratio)
Definition: Evaluates a company's ability to meet its short-term obligations without relying on inventory.
Formula: (Current Assets - Inventory) / Current Liabilities
Example:
Current Assets: $120,964
Inventory: $62,341
Current Liabilities: $35,723
Quick Ratio = ($120,964- $62,341) / $35,723 = 1.64
Interpretation: The business has $1.64 in liquid assets for every $1 of current liabilities.
Debt-to-Equity Ratio
Definition: Indicates the proportion of company financing that comes from creditors and shareholders.
Formula: Total Liabilities / Shareholders' Equity
Example:
Total Liabilities: $71,569
Shareholders' Equity: $142,151
Debt-to-Equity Ratio = $71,569 / $142,151 = 0.5
Interpretation: The business has $0.50 in debt for every $1 of equity.
Debt Ratio
Definition: Measures the proportion of a company's assets that are financed by debt.
Formula: Total Liabilities / Total Assets
Example:
Total Liabilities: $71,569
Total Assets: $213,720
Debt Ratio = $71,569 / $213,720 = 0.33
Interpretation: 33% of the company's assets are financed by debt.
Return on Assets (ROA)
Definition: Assesses how efficiently a company uses its assets to generate profit.
Formula: Net Income / Total Assets
Example:
Net Income: $65,216
Total Assets: $213,720
ROA = $65,216 / $213,720 = 0.31 or 31%
Interpretation: The business generates a profit of 31% from its assets.
Return on Equity (ROE)
Definition: Measures the profitability of a company relative to shareholders' equity.
Formula: Net Income / Shareholders' Equity
Example:
Net Income: $65,216
Shareholders' Equity: $142,151
ROE = $65,216 / $142,151 = 0.46 or 46%
Interpretation: The business generates a profit of 46% for every dollar of equity invested.
Working Capital
Definition: Indicates the short-term financial health of a company.
Formula: Current Assets - Current Liabilities
Example:
Current Assets: $120,964
Current Liabilities: $35,723
Working Capital = $120,964 - $35,723 = $85,241
Interpretation: The business has $85,241 available in excess of its short-term obligations.
This brings us to the end of our Balance Sheet series. I hope you have found it helpful. If you have any questions about any of the content or need help setting one up for your business don’t hesitate to contact KLV Accounting. We at KLV Accounting offer free consultations on many different topics and are always happy to help.
In the next blog we will start our discussion on the Income Statement.
KLV Accounting, a Calgary-based accounting firm, is here to help. Contact us today to enhance your financial strategy, minimize your taxes, and drive business success! For a free consultation, call us at 403-679-3772 or email us at info@klvaccounting.ca.
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