A Simple Guide to Understanding your Balance Sheet
Updated: Jan 4
Have you ever had a meeting with a CPA and left feeling like they were talking another language? Understanding financials reports such as the Balance Sheet really isn't that difficult if we break it down into basic terms.
A Balance Sheet is a Snapshot of your business' net worth
A balance sheet is a snapshot of a business's financial condition at a specific period in time, usually at the close of an accounting period. (A balance sheet comprises assets, liabilities, and owners' or stockholders' equity.)
Assets = Liabilities + Owners Equity
An asset is anything the business owns that has value. Liabilities are anything the company owes against the assets of the business.
What is a balance sheet used for? A balance sheet helps a small-business owner understand the financial strength and capabilities of the business. Is the business in a position to add a new location? How much does the business owe? What is the business worth?
Analyze Trends: Accounts Receivables and Payables
Balance sheets can identify and analyze trends, particularly in the area of receivables and payables. Can receivables be collected more aggressively? Is some debt uncollectable?
Profit and Loss Reports and Balance Sheets are used to show potential lenders such as banks, investors, and vendors who are considering how much credit to grant the firm.
ASSETS: Assets are subdivided into current and long-term assets to reflect the ease of liquidating each asset.
Current assets Current assets can be easily converted into cash within one year
Cash Money available immediately usually checking accounts
Accounts receivables Money owed to the business for purchases made by customers, suppliers, and vendors
Notes receivables Notes due within one year are current assets
Fixed assets include land, buildings, machinery, and vehicles that are used with the business.
Land is considered a fixed asset but, unlike other fixed assets, IS NOT depreciated.
Buildings are categorized as fixed assets and ARE depreciated over time.
Office equipment This includes office equipment such as copiers, fax machines, printers, and computers used in your business.
Machinery and equipment used in your business to produce your product.
Vehicles This would include any vehicles used in your business
TOTAL FIXED ASSETS: This is the total dollar value of all fixed assets in your business, less any accumulated depreciation.
TOTAL ASSETS: This figure represents the total dollar value of both the short-term and long-term assets of your business.
LIABILITIES AND OWNERS EQUITY: This includes all debts and obligations owed by the business to outside creditors, vendors, or banks that are payable within one year, plus the owners' equity.
Accounts payable This includes all short-term obligations owed by your business to creditors, suppliers, and other vendors. Accounts payable can include supplies and materials acquired on credit.
Notes payable This represents money owed on a short-term collection cycle of one year or less. It may include bank notes, mortgage obligations, or vehicle payments.
Accrued payroll and withholdings This includes any earned wages or withholdings that are owed to or for employees but have not yet been paid.
TOTAL CURRENT LIABILITIES This is the sum total of all current liabilities owed to creditors that must be paid within a one-year time frame.
Long-term liabilities are any debts or obligations owed by the business that are due more than one year out from the current date.
Owners' equity is made up of the initial investment in the business as well as any retained earnings that are reinvested in the business.
Common stock is issued as part of the initial or later-stage investment in the business.
Retained earnings These are earnings reinvested in the business after the deduction of any distributions to shareholders, such as dividend payments.
TOTAL LIABILITIES AND OWNERS EQUITY:
This comprises all debts and monies that are owed to outside creditors, vendors, or banks and the remaining monies that are owed to shareholders, including retained earnings reinvested in the business.