Two types of balance sheets: Analytical tools that investors must know

Why Study the Balance Sheet?

Before understanding how 2 types of Balance Sheets differ, you should know why it is important. This financial statement is a “map” that shows how much wealth a business has, how much debt it owes, and how much capital shareholders will receive at a specific point in time.

For investors, studying the Balance Sheet helps you assess the company’s ability to pay debts, profitability, and financial stability before making decisions. For management, it is a tool to monitor financial health and compare with industry peers.

What is a Balance Sheet? Deep Dive into the Definition

Balance Sheet ( or Financial Position Statement ) is a financial statement created to show the company’s financial position, based on the fundamental equation:

Assets (Assets) = Liabilities (Liabilities) + Equity (Equity)

This equation has been the core of accounting since the past because both sides must always balance. Assets refer to resources owned by the company, such as cash, accounts receivable, inventory, land, machinery, and other income-generating assets.

Liabilities and equity are sources of funds used to acquire those resources.

Main Structure: 3 Key Components to Know

1. Assets - The company’s resources

Assets are divided into 2 categories based on liquidity:

Current Assets - Cash, trade receivables, inventory, and other assets that can be converted into cash within 12 months. These resources are highly liquid and vital for daily operations.

Non-current Assets - Land, buildings, machinery, vehicles, patents, and long-term investments. These have a longer useful life than 1 year and are less liquid.

2. Liabilities - The company’s obligations

Liabilities are amounts the company must repay to lenders or creditors:

Current Liabilities - Trade payables, short-term loans, taxes payable, due within 12 months.

Non-current Liabilities - Long-term bank loans, long-term bonds payable, with a repayment period exceeding 1 year.

3. Shareholders’ Equity - The true value of the company

Shareholders’ Equity = Assets - Liabilities. It reflects the actual value that shareholders and owners will receive if all debts are settled.

It consists of 2 parts: capital contributed by shareholders and accumulated profits (or losses) over the years.

2 Types of Balance Sheets: Different Presentation Styles

Although the fundamental equation remains the same, the way financial items are presented differs:

Type 1: Accounting Form (Balance Sheet)

This format displays items like a “T-account” — assets on the left, liabilities and equity on the right.

Advantages: Easy to observe balance, provides a clear overview.

Steps to prepare:

• Write a header with 3 lines: company name, the word “Balance Sheet,” and the date prepared.
• List all assets on the left side.
• List all liabilities and equity on the right side.
• Ensure both sides balance with equal totals.

Type 2: Report Form (Balance Sheet)

This format lists items vertically from top to bottom, following account categories: Assets → Liabilities → Shareholders’ Equity.

Advantages: Clear structure, aligns with report content, useful for detailed analysis.

Steps to prepare:

• Write a header with 3 lines as above.
• Show current and non-current assets with totals.
• Show current and non-current liabilities.
• Show shareholders’ equity.
• Verify that total liabilities + equity = total assets.

Why the Name Changed to “Statement of Financial Position”?

In the past, the term “Balance Sheet” simply meant “the statement balances.” It did not specify what kind of statement it was. International financial reporting standards changed the name to “Statement of Financial Position” to clearly reflect its purpose — to show the company’s financial standing.

Thailand also adopted the name “Financial Position Statement” to align with international standards.

How to Use the Balance Sheet Effectively

( Step 1: Verify the Balance

First, confirm that total assets = total liabilities + total equity. If not, there may be accounting errors.

) Step 2: Analyze Liquidity

Compare current assets with current liabilities. A company with more current assets generally has better debt-paying ability.

( Step 3: Assess Debt Burden

Look at the ratio of liabilities to equity. Excessive leverage can indicate higher risk.

) Step 4: Year-over-Year Comparison

Observe how assets, liabilities, and equity change over multiple years. This indicates the company’s trend.

Cautions When Reading a Balance Sheet

1. Outdated Data - The balance sheet shows a snapshot at a specific date, not real-time data. Significant events after that date may render figures inaccurate.

2. Reliability - The accuracy depends on accounting quality. Manipulated figures may not reflect true status.

3. External Factors - Economic conditions, interest rates, exchange rates, and inflation can affect past figures’ relevance to current conditions.

4. Additional Information - Do not rely solely on the balance sheet. Review income statements, cash flow statements, and other data for a comprehensive analysis.

Where to Find Company Balance Sheets?

Investors can visit Datawarehouse.dbd.go.th, select “Company Data and Financial Statements,” then search for the company name. Next, choose the “Financial Data” tab to view annual figures, financial ratios, and compare with competitors.

Summary

2 Types of Balance Sheets — the T-shape ###and the Vertical ### — serve the same purpose: to show the company’s financial position. The only difference is in presentation style.

For investors, understanding how to read and analyze the balance sheet is a vital skill. It helps you see the company’s financial capacity, liquidity, and profitability before investing. Remember to consider other financial data and external factors for a comprehensive and reliable analysis.