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Understanding the Balance Sheet

Turn that hassle into a hustle! Hirap ‘no?

It may seem really challenging and difficult, but it’s not only the job of the accountants or finance majors to check out and interpret the values in the financial statements. Difficult to absorb this? Well, yes. It will be difficult to take in. Number here, numbers there! But, understanding the balance sheet is both an art and science. It takes determination and a great skill in interpreting the numbers.

The balance sheet is one of the important financial statements that not only accountants must see, but even investors and traders. If you want to see the financial position of the company, check on the balance sheet! It reflects the growth of the assets and liabilities. At the same time, with the numbers on the balance sheet, you can see how the company handles the debt, “Malaya na ba sa utang?”. Now let’s understand the structure of the balance sheet. There are 3 main elements that makes up a balance sheet. We have the assets, liabilities, and owner’s equity. Now, let’s get to know more of each element. 

The Assets

Assets are known to be the resources of the company, which is divided into 2: the current and non-current. The difference between the current and non-current is the liquidity. Current assets are the resources that can be easily converted into cash, on a time period of 1 year. You must check on this portion to know if the company relies more on assets than liabilities. The examples of current assets are cash, accounts receivables, and prepayments.

On the other hand, non-current assets are the resources that would take more than a year to be converted into cash. These types of assets do not necessarily need a during of 12 months to have the resources cashed. Some examples are long term investment, PPE (Plant, Property, and Equipment) and other intangible assets. 

Checking the summary of the balance sheet or the graph of the assets can say a lot about the company’s growth on their resources. You may want to consider a company who can also easily liquidate its resources!

The Liabilities

Liabilities are obligations of a certain enterprise or a company. Just like the assets, liabilities are divided into a current and non-current liability. Current liabilities are expected to be settled within 12 months or 1 year. Examples of current liabilities include accounts payable, notes, loans, and interest payable. Meanwhile, non-current liabilities are expected to be settled after 1 year. Examples of this are mortgage, bonds, and long-term notes payable.

“Utang na naman!” Is this necessarily a bad thing? No! Liabilities can serve as another source of assets. However, if it turns out that you rely on too much liability, you can experience financial hardships! Remember, kahit si Aling Marites, mahihirapan kakasingil ng tatlong buwang utang mo!

The Equity

The equity illustrates the claimed resources of the business by the owner. These includes the capital investments, drawings, common stock, preferred stock, and the retained earnings. Take note that if the company has a negative equity, it illustrated that the quantity and value of its assets are not capable of covering the company’s liabilities, and this is a warning signal!

The balance sheet is more than just the assets, liabilities, and equity. This financial statement shows if the company is able to pay its obligations when times are rough, just like during this pandemic. With the help of the balance sheet, you can identify whether or not the company is a good investment through its value in assets, liabilities, and equity!

At the same time, mastering the skill in checking at the figures can help you know the company’s growth and sustainability. Continue to be wise and disciplined in studying your lessons and analysis! Sooner or later, you are able to choose your stocks wisely!

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