Assets and Liabilities: The Correct Understanding of the Balance Sheet

If you’ve ever wondered what a Balance Sheet is and why many say it is extremely important for investors, this article will help you understand clearly. The Balance Sheet is not just a boring numerical document, but a tool that tells the story of a company—its products, liabilities, and true value.

What is a Balance Sheet? Basic Knowledge You Need to Know

Balance Sheet (In Thai, it is called “งบแสดงฐานะทางการเงิน” or also known as “งบดุล”) is a financial document that reflects a snapshot of a company’s position at a specific point in time. It shows us:

• What assets and resources the company owns
• Who the company owes and how much
• The net worth of the owners

Thinking of the Balance Sheet as a way to check the financial health of a business helps executives and investors easily understand the company’s strength and weaknesses.

The Basic Equation of the Balance Sheet

The core of the Balance Sheet is very simple:

Assets = Liabilities + Equity

Why is it called the “Balance Sheet” (or “งบดุล”)? Because the left side (Assets) must always equal the right side (Liabilities + Equity). Both sides need to be in balance—that’s where the name comes from.

Currently, the international financial reporting standard (IFRS) has renamed the Balance Sheet to “Statement of Financial Position” to better reflect its purpose—showing the company’s financial standing.

Structure of the Balance Sheet Comprises 3 Main Components

1. Assets (Assets): Resources owned by the company

Assets are what the company owns—however, assets differ based on how quickly they can be converted into cash.

Current Assets (Current Assets) - Liquid assets that can be easily converted into cash

• Cash and cash equivalents
• Trade receivables (Money owed by customers)
• Inventory (Unsold goods)
• Prepaid expenses
• Other assets that can be converted into cash within one year

Non-Current Assets (Non-Current Assets) - Fixed assets that take time or cannot be easily converted into cash

• Land, buildings, and structures
• Machinery and equipment
• Vehicles
• Long-term investments
• Patents, copyrights, and other intellectual property

2. Liabilities (Liabilities): Obligations to be paid

Liabilities are what the company must repay to external parties, whether individuals or legal entities. Liabilities are divided into two categories based on the repayment period:

Current Liabilities (Current Liabilities) - Due within one year

• Trade payables
• Tax liabilities
• Short-term bank loans
• Salaries and accrued benefits

Non-Current Liabilities (Non-Current Liabilities) - Due after more than one year

• Long-term bank loans or financial institution borrowings
• Long-term bonds (Corporate Bonds)
• Other liabilities with a maturity date beyond one year

3. Owner’s Equity (Equity): The true value of the owner

Owner’s equity is the “net assets” of the company—what remains for the owner and shareholders after deducting liabilities. It includes:

Shareholders’ Capital - Money invested by shareholders from the start

Retained Earnings (Retained Earnings) - Profits earned by the company each year after paying dividends to shareholders. If the company incurs a loss, the accumulated deficit will be negative.

Presentation Formats of the Balance Sheet: Two Main Types

Format 1: Accounting Form (Tabular Format)

This format arranges the balance sheet like a T: assets on the left, liabilities and equity on the right. It is the most popular because it is easy to read and understand.

Steps to prepare:

1. Write a header with three lines: Company Name / “Statement of Financial Position” / Date of preparation
2. Left side: List all asset items and their totals
3. Right side: List liabilities and equity items and their totals
4. Ensure both totals are equal

Format 2: Report Form (Vertical Format)

This format arranges the information downward: Assets → Liabilities → Equity. It is commonly used in annual reports.

Steps to prepare:

1. Write the same header
2. Part 1: Assets (Current + Non-Current) with total
3. Part 2: Liabilities (Current + Non-Current) plus Equity with total
4. Verify that total assets = total liabilities + total equity

Why is the Balance Sheet Important?

For Management

• Assess financial health: whether the company has enough liquid assets
• Strategic planning: decide whether to invest more, expand, or cut expenses
• Compare with competitors: see where our financial position stands

For Investors

• Liquidity analysis: Can the company pay its debts based on current assets and liabilities?
• Profitability potential: Continuous retained earnings indicate how well the company generates income
• Risk assessment: Excessive liabilities compared to assets imply higher risk

For Creditors and Regulators

• Check the company’s ability to repay debts
• Assess credibility and trustworthiness

How to Read a Balance Sheet Correctly

Step 1: Check the basics

Before diving deep, verify:

• The date of the Balance Sheet (When)
• The company’s name and financial perspective (Quarterly or annual)

Step 2: Understand the structure

• Assets = Resources and goods
• Liabilities = Obligations
• Equity = Net assets

Step 3: Analyze totals

• Total assets: Are they increasing or decreasing?
• Total liabilities: Are they too high or acceptable?
• Equity: Is it growing or shrinking?

Step 4: Analyze ratios and trends

• Current Ratio = Current Assets ÷ Current Liabilities (Should be greater than 1)
• Debt-to-Equity Ratio = Total Liabilities ÷ Equity (Less than 1-2 is good)
• Asset Turnover = Revenue ÷ Total Assets (Higher indicates efficient use of assets)

Step 5: Compare over periods

Don’t look at just one Balance Sheet. Compare:

• Quarterly or yearly trends: upward or downward
• With other companies in the same industry
• With the company’s historical data

Where can you view the Balance Sheets of various companies?

In Thailand, investors and interested parties can view the Balance Sheets of listed companies and various businesses at:

Sources:

• Datawarehouse.dbd.go.th - View company account data and financial statements
• SET website (Stock Exchange of Thailand) - For listed companies
• Directly on company websites - Usually in the Investor Relations section

How to access:

1. Visit Datawarehouse.dbd.go.th
2. Select “Legal Entity and Financial Data” menu
3. Enter the company name
4. Click on the “Financial Statements” tab
5. Choose the fiscal year, income statement, ratios, and compare as needed

Caution: Read the Balance Sheet Wisely

Although the Balance Sheet is a useful tool, it has limitations you should be aware of:

1. Data is historical (Historical Data)

The Balance Sheet reflects the financial position as of the date prepared (e.g., December 31). It is not real-time data. If significant events occur after the date, the information may no longer be current.

2. Reliability of data

• The Balance Sheet must be audited (by an auditor) to be credible
• However, companies may still manipulate figures, so always read the notes to the financial statements

3. External factors

• Economic conditions: inflation, interest rates, currency devaluation can affect asset and liability values
• Therefore, read in conjunction with current economic data

4. Must be read together with other financial statements

A good Balance Sheet should be accompanied by:

• Income Statement (Profit and Loss Statement) - shows revenue and profit
• Cash Flow Statement (Statement of Cash Flows) - shows actual cash movement

Summary

A Balance Sheet is a document that tells the story of a company—its assets, liabilities, and net worth. The simple formula “Assets = Liabilities + Equity” is central to financial analysis.

For management, it helps assess financial health and strategic planning. For investors, it aids in analyzing profitability, liquidity, and debt capacity.

Learning to read a Balance Sheet correctly is a vital skill—whether you are an executive, investor, or just interested in finance. The key is to read critically, compare over different periods, look at other financial statements, and consider the economic context.