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Visual Learning – A balance sheet in 3 pictures

4 April 2016 | Published by AME

Do you find financial statements threatening? Do you have no idea what they’re trying to convey? Do you find the jargon and numbers like a maze with no exit?
Well.. Financial statements should tell a story – a very simple, clear, understandable story about what happened in the business. Let’s begin to understand that story by making sense of just one component of financial statements – the balance sheet.

Balance Sheet #1

As depicted in Balance Sheet #1 above, a balance sheet has only 3 parts:

  • Assets– What the business owns
  • Liabilities – What the business owes
  • Equity – the owner’s share

The assets of a business will be funded by liabilities (debt) and/or equity (shareholders or owners). It’s that simple.

Why is a balance sheet called a balance sheet?
Simply because the assets (in blue) and the liabilities and equity (in red) will always equal each other and will always be in balance. Or, in other words, at any point in time what we own will be equal to what we owe plus our owner’s share.

Balance Sheet #2

As shown in Balance Sheet #2, a business can fund it’s assets with a whole lot of liabilities (debt) and very little equity. We call a company which funds most of it’s assets this way a company that is “highly geared” or has “high leverage“.

Balance Sheet #3

On the other hand, as we see in Balance Sheet #3, a business can fund it’s assets with a whole lot of equity and very few liabilities (debt) . We call a company which funds most of it’s assets this way a company that has “low gearing” or has “little leverage“. It really is as simple as these three pictures.