Balance Sheet Analysis: A Step by Step Walkthrough

Thursday, 1 October 2026

A balance sheet is a financial statement that shows what an organisation owns, what it owes and the difference between the two at a specific point in time. It is sometimes called the statement of financial position. The Australian Accounting Standards Board (AASB) sets the standards that govern how balance sheets are prepared across both the private and public sectors in Australia. Unlike the income statement, which shows performance over a period, the balance sheet is a snapshot: it tells you where the organisation stands financially on the day it was prepared. This walkthrough covers the six steps for reading a c and extracting the information that matters.

Step 1: Understand the structure

Every balance sheet has three sections. Assets are the resources the organisation controls that are expected to provide future economic benefit. Liabilities are the obligations the organisation owes to external parties. Equity (or net assets in government) is the residual: what is left after liabilities are subtracted from assets. The fundamental equation is Assets = Liabilities + Equity. If the two sides do not balance, there is an error. Assets are subdivided into current (expected to be converted to cash or consumed within 12 months) and non current (held for longer than 12 months). Liabilities follow the same subdivision.

Step 2: Assess liquidity

Liquidity is the organisation’s ability to meet its short term obligations. The current ratio (current assets divided by current liabilities) is the standard measure. A ratio above 1.0 means the organisation has more short term assets than short term liabilities. The CPA Australia analysis of public sector accounting notes that accrual accounting made government balance sheets possible by recognising assets and liabilities that cash reporting could not capture. In government, the liquidity assessment must account for appropriation funding: an entity may have a current ratio below 1.0 but remain solvent because future appropriations will cover the shortfall.

Step 3: Examine asset composition

What does the organisation own? The asset side of the balance sheet reveals the mix between cash, receivables, inventory, property, plant, equipment and intangible assets. In government, infrastructure assets (roads, bridges, water systems) and land and buildings are typically the largest categories. The Commonwealth Department of Finance’s RMG 125 provides guidance on how Commonwealth entities prepare their financial statements, including the valuation and disclosure of non current assets. A balance sheet dominated by receivables may indicate collection risk. One dominated by non current assets with minimal cash may indicate a liquidity challenge.

Step 4: Examine liability composition

What does the organisation owe? Current liabilities include trade payables, employee entitlements due within 12 months and short term borrowings. Non current liabilities include long term debt, superannuation obligations and provisions for future costs such as remediation or warranties. In government, employee entitlements (annual leave, long service leave) are often the largest liability category. A growing employee entitlements balance may indicate that staff are accumulating leave faster than they are taking it, which creates both a financial liability and a workforce management risk.

Step 5: Calculate key ratios

Three ratios provide the most useful insights. The current ratio (current assets / current liabilities) measures liquidity. The debt to equity ratio (total liabilities / equity) measures how the organisation is funded: a higher ratio means more reliance on debt or obligations relative to equity. The asset turnover ratio (revenue / total assets) measures how efficiently assets generate revenue. In government, the net financial worth (financial assets minus liabilities) is often more useful than the debt to equity ratio because many government assets are not financial in nature (infrastructure, heritage assets) and cannot be liquidated to meet obligations.

Step 6: Compare over time

A single balance sheet tells you where the organisation stands today. Comparing balance sheets over three to five years tells you whether its financial position is improving, stable or deteriorating. Is the current ratio trending upward or downward? Are liabilities growing faster than assets? Is the proportion of non current assets changing, suggesting underinvestment or overinvestment? The ANAO’s approach to financial statement analysis emphasises trend analysis as a tool for identifying systemic issues that a single year’s data cannot reveal.

How can professionals build this capability?

AcademyGlobal (AG), the Chartered Institute of Procurement & Supply (CIPS) Centre of Excellence for Australia, New Zealand and Southeast Asia, is also the exclusive Australian partner for the Chartered Institute of Public Finance and Accountancy (CIPFA). AG’s Analysing Financial Statements program builds the practical skills to read, interpret and act on balance sheets, income statements and cash flow statements in government and organisational settings. For professionals pursuing an internationally recognised public finance qualification, AG’s CIPFA Study Centre delivers the CIPFA qualifications pathway in Australia.

A balance sheet is the most honest financial statement an organisation produces. It shows what is really there, not what management hopes will happen. The professionals who can read it clearly are the ones whose financial judgement organisations rely on.

Frequently asked questions

What is a balance sheet?
A financial statement showing what an organisation owns (assets), what it owes (liabilities) and the residual value (equity or net assets) at a specific point in time.
What is the fundamental equation?
Assets = Liabilities + Equity. Both sides must balance. If they do not, there is an error in the accounts.
What is the most important ratio for balance sheet analysis?
The current ratio (current assets / current liabilities) measures whether the organisation can pay its short term obligations. A ratio above 1.0 indicates adequate liquidity.
How is a government balance sheet different?
Government balance sheets include infrastructure assets, employee entitlements and superannuation liabilities that are invisible in cash reporting. Liquidity must be assessed with appropriation funding in mind.
Where can I learn to analyse financial statements?
AcademyGlobal’s Analysing Financial Statements program builds practical skills for reading balance sheets, income statements and cash flow statements.

References

1. AASB, “General FAQs,” Australian Accounting Standards Board
2. CPA Australia, “Cash to Accrual: What Does the Global Public Sector Shift Mean?” INTHEBLACK
3. Department of Finance, “Foundations for Financial Statements,” RMG 125
4. ANAO, “Australian Government Grants Reporting,” Information Report 2025-26
5. AcademyGlobal, “What Is Contract Lifecycle Management (CLM)?” September 2026