How to read any Balance Sheet

The Curious Manager

As a follow-up to my popular post How to read any P&L, I will elaborate a bit on how to interpret a Balance Sheet and its main components. Only after truly understanding a Balance Sheet, you can make your way to building financial models or drawing up a cash flow statement.

Every Balance Sheet in the world has 3 parts: assets, equity and liabilities. Assets are what the company owns, liabilities are what the company owes. Equity is what is left for the stockholders if all assets are sold and all debts are paid. In other words, liabilities list the sources of the money, assets show the application thereof.  Every source has its application. That is why assets and equity+liabilities must always, at every day in the year,  be equal. If I would apply this on an individual buying an iPod with his credit card: the iPod is the asset, the…

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