Balance Sheet Basics

Normally, balance sheets are prepared at the end of the fiscal year. A balance sheet is a statement of the financial position of a person or business at a particular time, indicating the following:

• Assets
• Liabilities
• Owner’s equity

It balances assets against liabilities to determine what a company is worth at a certain time. Typically, balance sheets are drawn up at the end of the fiscal year or at another specified time, although they can be generated at any time. The purpose of the balance sheet contrasts with the purpose of an income statement:

• A balance sheet is a snapshot of financial viability, while an income statement takes a longer view.

One of the most important aspects in understanding the value of a property is to analyze the stability of the rental income stream. To do so, a real estate manager must often review a tenant’s assets and liabilities.

• An asset is an economic resource expected to produce future benefits.
• A liability is a debt or obligation.

Corporate assets such as cash, accounts receivable, and the building itself are the property’s economic resources. Apartment buildings, office buildings, and shopping centers are assets, assuming that they can provide income either through rentals or sale of the property.

Assets and liabilities are separated into short-term, or current, and long-term. Current assets are expected to be converted to cash or used up during the year. Long-term assets are resources that are held for any period longer than one year. Real estate is a prime example. Current liabilities fall due within the coming year, while long-term liabilities will be paid off over some extended time span.

Balance sheet ratios measure a company’s liquidity, which is the relative ease with which an asset can be disposed of or turned into cash. Working capital, net worth, and the current ratio all measure liquidity.

• Working Capital: the difference between total current assets and total current liabilities. Because working capital involves a short-term turnover of money, long-term assets and liabilities are not included.

Current Assets – Current Liabilities = Working Capital

• Net Worth: the value of a company’s assets minus its liabilities. The amount of increase of net worth indicates the overall growth and general financial health of the company.

Total Assets – Total Liabilities = Net Worth (Owner’s Equity)

• Current Ratio: shows the ability to pay current bills with funds on hand and indicates the company’s liquidity.

Current Assets ÷ Current Liabilities = Current Ratio