Balance Sheets - How to Analyze a Balance Sheet Properly

A similar definition can be given for profit & loss account of any firm. Profit & loss account is a statement showing the income earned & expenditure incurred by the firm in the coursework of a specific period.

A balance sheet is thought about to be the statement showing the business position of any company, firm or business organization as on a specific date. When it comes to business position, it represents the assets owned by the firm & liabilities owed by the firm to others.

Of coursework, the period can be every month, quarterly, half yearly or yearly. In plenty of countries, as per statutory rules in force, each firm has to publish the balance sheet & profit & loss account at least one time a quarter.



Nowadays, the balance sheets are either provided in account form or statement form. For the purpose of analysis of any balance sheet, the liabilities can be bifurcated in to long term liabilities consisting of capital, reserves and long term borrowings and short term liabilities consisting of sundry creditors, overdraft availed from the bankers, advance payments received from the customers and any other provisions. The liabilities are substituted by the word namely; sources and similarly the assets are substituted by the words namely; applications or makes use of.

When it comes to the financial statements namely; balance sheet and profit and loss account of any firm, the following are the interested parties who are willing to know the details: the owners of the firm called as shareholders or stakeholders; the creditors who have been providing the materials necessary by the firm on credit terms; the bankers who had granted limits to the firm or who are willing to provide financial assistance to the firms; the debtors who are the users of the products and services provided by the firm; the auditors and the government.

The long term makes use of consist of land, building, machinery, intangible assets, noncurrent assets and short term makes use of consist of money balance held by the firm, balance held in the bank, sundry debtors, stock of goods and advance paid to the suppliers.

The analysis of any balance sheet is done using ratio analysis and the ratios are classified in to liquidity ratios, profitability ratios and solvency ratios.

Current ratio and fast ratio or acid check ratio are classified in to liquidity ratios. Debt equity ratio and debt service coverage ratio are called as solvency ratios.
Gross profit ratio, net profit ratio etc. are called as profitability ratios

Source : A. Gauri Sankar