How to Read a Balance Sheet

The Accounting Equation in Action

Every balance sheet is built on one equation:

Assets = Liabilities + Equity

This isn't a formula you apply — it's a mathematical identity that's always true. If a company has SAR 500,000 in assets and SAR 200,000 in liabilities, then equity must be SAR 300,000. There's no other possibility.

The balance sheet simply presents this equation in a structured format. The left side (or top) lists assets. The right side (or bottom) lists liabilities and equity. The two sides always balance — that's where the name comes from.

Assets: What the Company Owns

Assets are resources the company controls that are expected to provide future economic benefit. They're split into two groups:

Current Assets — will be converted to cash or consumed within 12 months: - Cash and cash equivalents - Accounts receivable (money customers owe) - Inventory (goods waiting to be sold) - Prepaid expenses (rent, insurance paid in advance)

Non-Current Assets — will benefit the company for more than 12 months: - Property, plant, and equipment (land, buildings, machinery) - Intangible assets (patents, trademarks, goodwill) - Long-term investments

Assets are listed in order of liquidity — how quickly they can be converted to cash. Cash comes first, land comes last.

Total Assets: SAR 526,000

Liabilities: What the Company Owes

Liabilities are obligations the company must settle in the future. Like assets, they're split by timeframe:

Current Liabilities — due within 12 months: - Accounts payable (money owed to suppliers) - Salaries payable (wages earned by employees, not yet paid) - Unearned revenue (customer prepayments for undelivered services) - Short-term loans and current portion of long-term debt

Non-Current Liabilities — due beyond 12 months: - Long-term bank loans - Bonds payable - Lease obligations

Total Liabilities: SAR 185,000

Equity: What Belongs to the Owners

Equity is the residual — what's left of the company's assets after subtracting all liabilities. It represents the owners' claim on the business.

For a corporation: - Share capital — money invested by shareholders when shares were issued - Retained earnings — accumulated profits that haven't been distributed as dividends

For a sole proprietorship: - Owner's capital — the owner's total investment plus accumulated profits minus withdrawals

Check: Assets (526,000) = Liabilities (185,000) + Equity (341,000). Balanced.

Retained earnings connects the income statement to the balance sheet. If the company earned SAR 98,600 net income this period and paid SAR 20,000 in dividends, retained earnings increased by SAR 78,600. That increase shows up here.

A Complete Balance Sheet

Putting it all together for Rayyan Industries as of December 31, 2025:

Reading a Balance Sheet: What the Numbers Reveal

The raw numbers matter less than the relationships between them.

Current Ratio = Current Assets ÷ Current Liabilities Rayyan Industries: 211,000 ÷ 65,000 = 3.25. For every SAR 1 of short-term obligations, the company has SAR 3.25 in short-term assets. Generally, above 1.5 is comfortable. Below 1.0 means the company may struggle to pay near-term bills.

Debt-to-Equity = Total Liabilities ÷ Total Equity 185,000 ÷ 341,000 = 0.54. The company has SAR 0.54 of debt for every SAR 1 of equity. This is moderate leverage. A ratio above 2.0 might signal heavy reliance on borrowed money.

What does the asset composition tell you? Rayyan has SAR 200,000 in land and SAR 115,000 in equipment — about 60% of assets are tied up in long-term, illiquid resources. If the company suddenly needed cash, it couldn't quickly sell land. Compare this to a tech company, which might have 80% of assets in cash and receivables.

What about retained earnings? SAR 141,000 in retained earnings tells you the company has been profitable over its history and has reinvested most of those profits rather than distributing them. A negative retained earnings figure (accumulated deficit) would mean the company has lost more money than it has ever earned.

How the Three Statements Connect

The balance sheet doesn't exist in isolation. It connects to the other two core statements:

Income Statement → Balance Sheet: Net income flows into retained earnings. If the income statement shows SAR 98,600 net income, retained earnings on the balance sheet increases by that amount (minus any dividends).

Cash Flow Statement → Balance Sheet: The ending cash balance on the cash flow statement is the same Cash figure on the balance sheet.

Balance Sheet → Balance Sheet: Compare this period's balance sheet to last period's. The changes tell you where money came from and where it went. Did inventory grow? Did debt increase? Did equity shrink?

Understanding these connections is what separates someone who can read financial statements from someone who truly understands them. Practice building balance sheets from transaction data on Accountery — the platform checks your classifications, totals, and the equation balance in real time.