• Hong Kong
  • UK
  1. Osome Blog Singapore
  2. New Business Owners' Guide to Reading Balance Sheets

New Business Owners' Guide to Reading Balance Sheets

When it comes to managing your business, one of the most crucial financial statements is the balance sheet. We cannot emphasise how important it is to learn how to read a balance sheet to ensure your company's financial health.

To read a balance sheet, you will have to analyse your company’s reported assets, liabilities and equity to have a clearer idea of what your business owns and owes at a point in time. As overwhelming as that may sound, all it takes is a few key concepts to grasp, and you’d be reading a balance sheet like a pro.

By the way, if you want to fuel the growth of your company by focusing on core business activities, we get it. Why not leave the bookkeeping tasks to our experts?

Here’s everything you need to know about a balance sheet.

What Is a Balance Sheet?

A balance sheet is also known as a “statement of financial position”, designed to reflect the value of a company or organisation. The balance sheet reveals the company’s assets, liabilities, as well as the owners’ equity (net worth) as of a particular date, otherwise known as the “reporting date”. It goes hand in hand with two other key financial statements used to evaluate a business  — an income statement and a statement of cash flow between the two, known as the cash flow statement. All these financial statements might be prepared by accounting services.

A balance sheet is generally prepared and distributed on a monthly or quarterly basis, with its frequency of reporting being determined by the company policy or by law.

What Is the Purpose of a Balance Sheet?

The purpose of a balance sheet is for business owners and investors alike to better understand and gauge the general financial health of their business, on top of what the company owns and owes.

How Does a Balance Sheet Work?

As its name suggests, a balance sheet should always balance. A balance sheet is split into two portions and ensures both sides are equal, with this main formula:

Assets = Liabilities + Shareholder Equity

In other words, the company’s assets, or the means to operate the business, are balanced by the business’s financial obligations and equity investment brought into the business and its retained earnings.

Take note that the balance sheet provides a snapshot of your business’s financial position at a single point in time.

The Key Terms You Need To Know To Read a Balance Sheet

Let’s examine what is usually included in each of the 3 categories of value: assets, liabilities, and shareholders’ equity.

  1. Assets

An asset is anything of value owned by your business. In a balance sheet, your assets are usually considered positives and further categorised into current assets and non-current assets.

Current assets typically have a lifespan of a year or less, following which the company will convert into cash. This includes:

  • Cash and cash equivalents
  • Inventory
  • Prepaid expenses
  • Accounts receivable
  • Marketable securities
  • Land
  • Machinery
  • Buildings
  • Computers
  • Equipment used to produce goods or perform services
  • Intellectual property
  • Patents
  • Trademarks
  • Brands
  • Goodwill
  • Copyright

On the other hand, non-current assets are long-term investments that typically have a lifespan of over a year and are not easily converted into cash within a year. This includes tangible and intangible assets, such as:

  1. Liabilities

On the other side of the balance sheet, we have liabilities. Think of it as the opposite of an asset. While an asset refers to something a business owns, liability refers to something the company owes.

Liabilities are legal and financial obligations a company has to pay an amount of money to a debtor, and are generally tallied as negatives in a balance sheet. Just as assets are divided into current or non-current, liabilities are also split as current liabilities or non-current liabilities.

Current liabilities typically refer to those that must be paid within a year, which may include:

  • Payroll expenses
  • Utility payments
  • Rent payments
  • Accounts payable
  • Debt financing
  • Other accrued expenses
  • Leases
  • Bonds payable
  • Loans
  • Deferred tax liabilities
  • Provisions for pensions
  • Obligation to provide services or goods in the future
  • Hire purchases

Non-current liabilities, or long-term liabilities, are debts and other non-debt financial obligations which will not be due within a year, which may include:

A note on categorising loans and hire purchase:

Some loans can be split between current and non-current liabilities. When the loan is due within a year, it will be categorised under current liabilities. For the balance payable of the loan or hire purchase, due beyond a year, it will be categorised under non-current liabilities.

  1. Shareholders’ Equity

Shareholders' equity, also known as owners’ equity, refers to a company’s total net worth. It factors in the initial amount of money an owner invests in the business. If the company reinvests its net earnings at the end of the year, these will be considered retained earnings and will be reflected in the balance sheet under shareholders’ equity.

Let’s take a closer look at an example of a balance sheet. For instance, a company has:

  1. Assets:

Cash — $2,050

Accounts receivable — $6,100

Inventory — $900

Total assets — $9,050

  1. Liabilities

Accounts payable —  $150

Wages payable — $2,000

Total liabilities — $2,150

  1. Equity

Common stock — $5,000

Retained earnings — $10,900

Drawing — −$9,000

Total equity — $6,900

Applying the formula,

$9,050 (Assets) = $2,150 (Liabilities) + $6,900 (Equity)

The Bottom Line

The information reflected in a company’s balance sheet ranks among some of the most crucial for a business leader or potential investor to comprehend. Without the balance sheet, it can be tricky to gauge if a business is thriving or struggling, which is why reading a balance sheet is an important skill for anyone doing business.


Besides bookkeeping, If you need help with being a compliant company, our experienced accountants in Singapore can help you stay on top of paperwork.

Share this post:

Tips to run your business smarter.
Delivered to you monthly.

You'll receive a verification email you'll have to open and confirm the subscription.

You might like it


When Should I Hire An Accountant For My E-commerce Store in Singapore?

Starting an online business is an exciting journey. According to the Singapore Department of Statistics, online retail sales made up 15.2% of the retail trade in September 2021.


How To Upsell to Your E-commerce Customers

We are inundated daily with countless ads throughout our day, both online and offline. As an e-commerce store retailer, one of the challenges that you may face is trying to get your products and message across to prospective customers.


Types of Business Models for E-commerce

If you are planning to start a new e-commerce business venture, this is the best time to do it! For seasoned business owners who are thinking of diversifying their business into e-commerce, you are at the right place.


An E-commerce’s Checklist To Prepare for 2021 Holiday Sales

Although the sales period will mean that your customers’ shopping carts will be busier, this also brings about its own set of challenges for your online business. Follow our holiday season checklist to ensure your business is well equipped for the shopper surge.


What Important Records Must I Keep As A New Business Owner?

Good business record keeping is crucial, from managing costs for legal, regulatory or tax reasons to simply managing and improving your business. If you are just starting up your business, it might not be the first thing that comes to your mind, but it can help you build a strong foundation.

Running My Business

3 Things To Consider Before Renting Your First Office Space

If you have always been working from home for your small business and are contemplating moving to a bigger space to accommodate your staff and to have a central office location, you may be looking out for office spaces to rent.


Digital Payment Trends For E-commerce Sellers To Know

Today, consumers are switching from traditional payment methods, such as cash, cheque and cards to digital payment. The global pandemic has fuelled this unprecedented shift in the consumer’s behaviour.


Creating an Invoice When Selling on Amazon

This article helps Amazon sellers who are finding out how to create, access and share invoices on Amazon.


12 Ways To Drive More Traffic to Your Online Store

When your website is finally live, you want to share it with as many people as possible. How do you get people to your website and excited about your products and shop from your store?

Government Grant

Wage Support & Rental Relief for Businesses in Singapore’s Stabilisation Phase

Tighter COVID-19 restrictions will be implemented from 27 September to 21 November 2021. Find out what support SG companies can receive from this Stabilisation Phase.


A Design Guide for E-commerce Websites

If you’re looking to improve your e-commerce page and improve sales, you might want to learn the fundamentals of how to design a good website.

Entrepreneur's Bootcamp

Best Practice Invoicing Tips for SMEs

This article will help Singapore-based SMEs get to grips with the best invoicing practices. Take a look at the tips and how-tos to guide you toward being more streamlined and savvy.

Tips to run your business smarter. Delivered to you monthly.

You'll receive a verification email you'll have to open and confirm the subscription.

We’re using cookies! What does it mean?