Digit Lime Blog

How to Read a Balance Sheet

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2 minute read | Published May 14, 2023

A Balance Sheet is essentially a summary of things you OWN and things you OWE, at any given period of time.

First, there's Assets (own), then Liabilities (owe), which is known to many as debt. Lastly, the difference between the two is called Equity.

To make more sense of this, lets walk through a simple example:

At the end of March 2023, Joe's Diner took a snapshot of everything they own and owe. On the left side, we see the list of all of their assets (things owned). On the right, we'll find a list of liabilities (things owed) and Equity (the difference). The Balance Sheet gets its name because Total Assets = Total Liabilities + Equity. If it doesn't "Balance," an accounting error was made.

The simplest asset to understand is cash. They had almost $28K in their checking account on March 31. Next, they had almost $8K of food and beverage inventory. These are ingredients and drinks they already bought but haven't sold yet. Lastly, they have equipment and property. Equipment is things like ovens, stoves and refrigerators. Property would be the building they operate out of.

On the right side, we have a list of liabilities (or debts). They have a credit card balance of $4K and also loans on their equipment and property. These differ from the asset values because they've been paid down over time.

Lastly, we have equity (sometimes called net worth). Have you ever heard someone say they have "equity" in their home? This is how much their house is worth minus how much is left on the loan. This is the same thing as having equity in your business.

Pretty easy, right? Once you understand the basics, reading financial statements can be super insightful and help you understand your business, leading to better decisions.

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