How to Read a Balance Sheet like A Pro!

In today’s world, the cost of capital has become critical for any business to balance out its current investments for future profits.

It becomes critical to go back to the basics of understanding how to read and manage a balance sheet.

Why? Well, the balance sheet is a snapshot of the business, and it’ll tell you what assets the company has for its current revenue and profits, as well as its future liabilities.

Reading a balance sheet can distinguish between a successful and a failed business!

The purpose of the balance sheet is to report how the resources to run the business's operations were acquired. 

The Balance Sheet helps assess a business's financial risk, and the simplest way to describe it is the accounting equation (assets = liability + equity).

Let me give you a first glance at what a balance sheet looks like, then proceed step by step to explain it all!

Why the balance sheet is important

It has been my experience that competency in mathematics, both in numerical manipulations and in understanding its conceptual foundations (accounting), enhances a person’s ability to handle the more ambiguous and qualitative relationships that dominate our day-to-day financial decision- making by Alan Greenspan former FED Governor 

Understanding the balance sheet is critical to be able to dissect any business.

By looking at it, you can answer questions like: What is the leverage? Is the company liquid enough?

Remember, leverage is the proportion between equity and debt, while liquidity is the business's capacity to repay its short-term obligations and run its operations.

We'll start with the ten commandments of the GAAP accounting system.