Introduction to Financial Statements Lecture 2: The Balance Sheet (B/S) is the 'Company Blueprint'
1. What is a Balance Sheet?
A Balance Sheet is
a table showing the current structure of a company
.
A common explanation is that
the Profit and Loss Statement (PL) represents one year of activity (flow)
the Balance Sheet (BS) represents the accumulation (stock)
is a common way of putting it.
This is correct.
However, that alone is not enough.
The Balance Sheet is not just a 'list of assets', but
a structural table showing how a company raises money
and what form that money has currently taken
.
2. Read the Balance Sheet 'from right to left'
There is a mistake that beginners often make.
Reading it in order from the top
Looking at the cash
Looking at the profit on the bottom right
However, the essence is not there.
The first thing you should look at is the right side.
3. Right side = How to raise money (fundraising)
The right side of the balance sheet shows
how the company raised its money
.
This is broadly divided into two parts.
1. Liabilities
Liabilities are
borrowed money
.
Such as bank loans.
In the future, this is money that must be repaid.
2. Net Assets
This is the most difficult part for beginners to understand.
So, I will say it clearly.
■ What are net assets?
Net assets are
money that does not need to be repaid
.
So, what does it consist of?
There are two main components.
(1) Money provided by shareholders
When starting a company,
money that shareholders invested while saying,
'I support this company.'
This is called capital stock.
This is not a debt.
Basically, there is no obligation to repay it.
(2) The cumulative total of profits the company has earned so far
A company generates profit every year.
The sum of those accumulated profits is
retained earnings
.
In other words, net assets are
the money provided by shareholders
the total profit the company has earned to date
the sum of these two.
■ Let's summarize here
Assets → What the company owns (left side)
Liabilities → Money that must be repaid (top right)
Net Assets → Money that does not need to be repaid (bottom right)
Although the names are similar,
Assets and net assets are completely different things
.
■ Why is the word 'net' used?
If a company sells all its assets,
and pays off all its debts,
what remains at the end is net assets.
That is why the word 'net' is used.
4. Left side = Use of funds (assets)
The money raised on the right side
changes form on the left side.
Cash
Accounts receivable
Buildings
Machinery
Land
Inventory, etc.
In other words,
the money raised on the right changes its form on the left.
This is the basic structure of the balance sheet.
5. It is a one-shot view and a cumulative record
The balance sheet represents figures as of the closing date.
It is like a snapshot in time.
However, at the same time,
it is the accumulation of management from the founding until now.
It is also that.
If it says 10th term,
it means the results of 10 rounds (approx. 10 years) of management decisions have resulted in this current form.
6. Looking at the balance sheet reveals the 'company's personality'
The balance sheet is,
a mirror reflecting the company's business model.
it is.
Consulting firm → few fixed assets
Railway company → huge fixed assets
Retail industry → large inventory
Just by looking at the arrangement of numbers,
the structure of the company becomes visible.
7. Three points to grasp first
Read from right to left
It is the result of accumulation
The company's structure can be understood
Once you grasp these three points,
the balance sheet will no longer be intimidating.
Next Episode Preview
There are two reasons why many people stumble over financial statements.
They do not understand the structure of the balance sheet
They cannot understand depreciation
Next time,
I will explain the core concept that employees often misunderstand:
why cash does not decrease even when profits drop.