A company reports $70,000 in assets. To understand what that means, find out how much is cash, how much customers owe and what the company itself has to pay. The balance sheet records the company’s position on a particular date, so start by writing down that date before comparing it with another statement.
Start with the accounting equation
In a fictional business, assets total $70,000. This includes $15,000 cash, $10,000 in customer invoices, $15,000 in inventory and $30,000 in equipment. The company owes $45,000 to lenders and suppliers. Equity is the $25,000 left in the accounting equation after deducting liabilities from assets.
The SEC’s balance-sheet guide calls customer balances accounts receivable. Cash and receivables both appear as assets, but the customer has to pay the invoice before the company can spend that money. Inventory usually has to sell before it can turn into a receipt. The values in the statement describe how these items are recorded on that date.
Follow two different changes
Suppose customers pay $6,000 of the outstanding invoices. Cash rises from $15,000 to $21,000 and receivables fall from $10,000 to $4,000. The total assets stay at $70,000. The company has more money ready to use even though total assets are unchanged.
Now suppose the company borrows $10,000 in cash. Assets rise to $80,000 and liabilities rise to $55,000. Equity is still $25,000. The business has more cash and a matching increase in what it owes. The loan changes its financial position, while the income statement explains what it earned over the period.
Look at the deadlines
The SEC’s beginner guide explains the distinction between current and longer-term assets and liabilities. Read the due dates behind the balance sheet. A company may own valuable equipment while facing a supplier bill next week. The equipment’s accounting value and the money available to pay the supplier are different facts.
Compare the same line items across reporting dates. A rise in receivables can mean more credit sales or slower collections. Check the accompanying notes and the cash-flow statement for context. Those records help explain whether a changing balance comes from business activity, payment timing or financing.
Sources & further reading
- SEC balance sheet guide
Defines assets, accounts receivable, liabilities and equity with statement examples.
- SEC beginner’s guide to financial statements
Explains how the major financial statements describe different parts of a company’s finances.