How to read a balance sheet: A beginner’s guide
Understanding financial statements doesn’t have to be intimidating. Your practice’s balance sheet tells a clear story about its financial health: what you own, what you owe, and what’s left over. By learning how to read it, you’ll gain valuable insight into your ability to cover expenses, manage risks, and plan for future growth.
What is a balance sheet?
A balance sheet is a financial statement that offers a snapshot of your practice’s financial position at a specific point in time. It shows what your practice owns (assets), what it owes (liabilities), and what remains as equity.
In short, it’s a quick way to understand your practice’s overall financial health using this simple formula: assets = liabilities + equity.
Accessing and understanding your balance sheet
Regularly reviewing your balance sheet supports financial stability and plans for growth. You can generate balance sheets monthly, quarterly, or annually through your practice management software or your accountant. End-of-year tax documentation often includes a balance sheet summary.
By understanding it, you can make informed decisions about staffing, procedures, equipment purchases, and practice expansion.
Key concepts
Assets
Assets represent the resources owned by a dermatology practice that hold economic value. See below for an overview of the different types of assets commonly found on a balance sheet.
Current assets
Resources that are expected to convert into cash, be sold, or be used within one year.
Examples: Cash, accounts receivable (from insurance and self-pay patients), inventory of products, and prepaid expenses.
Long-term (non-current) assets
Long-term assets are resources or investments your practice expects to hold or use for more than one year. They provide lasting value and support the practice’s operation over time.
There are two main types of long-term assets.
Fixed assets
Physical items that have a long useful life and gradually lose value through depreciation.
Examples: Property or buildings, office furniture, medical equipment, and leasehold improvements.
Intangible assets
Non-physical items that add long-term value to your practice but are not depreciable and may be harder to measure.
Examples: Trademarks, patents, strong patient satisfaction and reputation, community presence, physician referral networks, and managed care contracts.
Other assets
Other assets include resources that do not fit into the categories of current or long-term assets. These items still hold value for the practice but are less common or not directly tied to daily operations.
Examples: Security deposits, miscellaneous receivables, and other non-current accounts.
Total assets
Total assets represent the sum of everything your practice owns or owed. This figure reflects the total value of your practice’s resources, both current and long-term.
Total assets = Current assets + Long-term assets + Other assets.
Liabilities
Liabilities represents what a practice owes — money, goods, services — because of transactions or obligations. In other words, they are the financial commitments your practice must settle within a defined period. The sections below outline the main types of liabilities you will find on a balance sheet.
Current liabilities
Debts or obligations your practice must pay within one year or one business cycle. These are usually settled using current assets, such as cash or receivables.
Examples: Accounts payable, wages payable, and payroll taxes payable.
Long-term/non-current liabilities
Debts or financial commitments that extend beyond one year. They represent obligations tied to long-term financing and operations of your practice.
Examples: Mortgage on your building, loan payments, pension or retirement plan liabilities, and lease obligations.
Owner’s equity
Owner’s equity represents the owner’s share of the practice — value remaining after liabilities are subtracted from assets. It can change over time based on financial performance, additional owner contributions, or withdrawals and distributions of profits.
Examples: Retained earnings, stock, and capital contributions.
Balance sheet quick reference
| Section | Definition | Examples |
|---|---|---|
Current Assets |
Resources expected to convert to cash within 1 year |
Cash, accounts receivable, inventory, prepaid expenses |
Long-Term Assets |
Resources held or used for more than 1 year |
Equipment, property, patents, trademarks |
Other Assets |
Non-typical resources |
Security deposits, miscellaneous receivables |
Current Liabilities |
Obligations due within 1 year |
Accounts payable, wages payable, payroll taxes |
Long-Term Liabilities |
Obligations due after 1 year |
Mortgage, equipment loans, lease obligations |
Owner’s Equity |
Owner’s share of practice |
Stock, retained earnings, capital contributions |
Sample balance sheet
Current assets |
Cash |
$50,000 |
||
Accounts receivables |
$75,000 |
|||
Supplies |
$10,000 |
|||
Prepaid expenses |
$5,000 |
|||
$140,000 |
||||
Long-term assets |
||||
Equipment |
$150,000 |
|||
Accumulated depreciation |
$20,000 |
|||
Intangible assets |
$50,000 |
|||
Other assets |
Security deposit |
$20,000 |
||
$240,000 |
||||
Total assets |
$380,000 |
|||
Current liabilities |
||||
Accounts payable |
$20,000 |
|||
Wages payable |
$15,000 |
|||
Payroll taxes payable |
$5,000 |
|||
$40,000 |
||||
Long-term liabilities |
Mortgage |
$100,000 |
||
Loan equipment |
$40,000 |
|||
$140,000 |
||||
Total liabilities: |
$180,000 |
|||
Owner’s equity |
Stock |
$100,000 |
||
Retained earnings |
$100,000 |
|||
Total owner’s equity |
$200,000 |
|||
Total liabilities & equity |
$380,000 |
How to read a balance sheet (step by step)
1. Start with total assets
Look at the total assets of your practice. Are they increasing or decreasing over time? This gives a sense of the overall growth or contraction of your practice.
2. Compare assets to liabilities
Check whether your practice has more assets than debts.
More assets than liabilities means the practice is financially stable
Liabilities greater than assets means the practice may face financial strain
3. Review liquidity
Liquidity measures how easily your practice can convert assets into cash without losing value. A higher liquidity ratio means you can cover short-term obligations more easily.
Current ratio = Current Assets / Current Liabilities
3.5 = 140,000 / 40,000
There is $3.50 in current assets for every $1 in current liabilities.
4. Check debt ratios (solvency)
Solvency measures your practice’s ability to meet its long-term financial obligations. A lower debt-to-equity ratio indicates less risk.
Debt-to-equity ratio = Total liabilities / total equity
0.90 = 180,000 / 200,000
For every $1 of equity, the practice has $0.90 in debt.
5. Monitor trends over time
Compare ratios and totals month-to-month or year-to-year to spot growth, risks, or areas needing attention. Regular review helps you make informed decisions about staffing, equipment, and practice expansion.
Key financial indicators
To fully assess your practice’s financial health, it’s important to look at liquidity, solvency, and profitability together.
Liquidity: Shows how easily your practice can turn assets into cash to cover short-term obligations. Evaluated using your balance sheet.
Solvency: Measures your practice’s ability to meet long-term financial commitments. Also assessed with your balance sheet.
Profitability: Indicates how much your practice earns relative to expenses. Determined from your income statement.
For a deeper understanding, compare your ratios to industry benchmarks or your practice’s historical trends. This helps identify patterns, strengths, and potential risks.
Why it matters
Your balance sheet is more than just a set of numbers. It’s a tool for understanding the financial health of your practice. By regularly reviewing assets, liabilities, and owner’s equity, you can spot trends, anticipate challenges, and make informed decisions for day-to-day operations and long-term growth. When combined with other financial statements, like your income statement, the balance sheet gives a complete picture of performance and empowers you to plan for the future.
Additional AAD resources
Practice finance and operations: See our growing resources for dermatologists on the business side of practice.
RVUs explained for dermatologists: Learn how Relative Value Units can impact your compensation.
Demonstrate your value: Use our guidance to maximize the financial impact you make.
This content was created with the particular needs of early-career dermatologists in mind. See the rest of our Career Launch resources for young physicians.
