A balance sheet is a statement of the financial status of a business that lists assets, liabilities and owners’ interests at a specific point in time. In other words, the balance sheet illustrates the net worth of your business.
The balance sheet may also have details of previous years, so you can do back-to-back comparisons for two consecutive years. This data will help you track your performance and identify ways to build your financial position and see what you need to improve.
You can also use the balance sheet to determine how to meet your financial obligations and find out the best way to use credit to finance operations.
The balance sheet is the most important of the three main financial statements used to illustrate the financial status of a business. The other two are:
- The income statement shows net income over a specific period of time, such as one month, quarter or year. Net income equals income for the period minus expenses.
- The cash flow statement shows the development and deviation of cash and cash equivalents. Chronic cash flows are a sign of troubled businesses.
The balance sheet, income statement and cash flow statement must be included in the financial report and cash flow statements to shareholders and tax and regulators. Preparing a balance sheet is optional for sole proprietorships and partnerships, but is useful for monitoring the health of your business.
A latest, accurate balance sheet is crucial for business owners seeking additional debt or equity financing or those who want to sell their business and need to determine their net worth.
All accounts in your general ledger are classified as assets, liabilities, or interests. The relationship between them is expressed in this equation:
Assets = Liabilities + Equity
The items listed on the balance sheet vary by industry, but overall, the balance sheet falls into these three categories.
As shown below, assets are usually organized into current assets: cash or assets that can be easily converted into cash, while non-liquid assets cannot be quickly converted into cash, such as land, buildings and equipment.
The asset list may also include intangible assets, which are more difficult to value. The accepted accounting principles (GAAP) standards only allow intangible assets to be listed on the balance sheet, and can be carried out by amort amort if they are assets with a lifetime and clearly identifiable fair market value (the possible price of a willing buyer who may purchase the assets from a willing seller). These reports minus depreciation on the balance sheet at original cost. This includes:
- Franchise Agreement
- copyright
- patent
Also read: What does commercial financing mean
Liabilities are funds owed by the business and are divided into current and long-term categories. Current liabilities are due within one year, including:
- Accounts payable (Supplier invoice)
- salary
- Income tax exemption
- Pension Plan Donations
- Medical plan payment
- Buildings and equipment rentals
- Customer deposit (early payment of goods or services to be delivered)
- Utilities
- Temporary loan, line of credit or overdraft
- interest
- Mature debt
- Purchase tax and/or goods and services tax tax
Long-term liabilities are payable in one year. These may include deferred tax liabilities, any long-term debts, such as interest and principal on bonds, and any pension fund liabilities.
Equity, also known as shareholder equity, remains after subtracting liabilities from assets. Retained earnings are the revenue retained by the company, i.e. paid to shareholders in the form of dividends.
Retaining revenue is used to repay debts, or otherwise reinvest the business to take advantage of growth opportunities. While the business is in the growth phase, the retained income is often used to fund expansion rather than pay to shareholders as dividends.
Example of balance sheet
Company Name
Balance sheet___________ (date)
| assets | $ | Liabilities | $ |
| Current assets: | Current liabilities: | ||
| Bank cash | $18,500.00 | Accounts payable | $4,800.00 |
| Small cash | $500.00 | Payment | $14,300.00 |
| Net cash | $19,000.00 | Office rent | – |
| stock | $25,400.00 | Utilities | $430.00 |
| accounts receivable | $5,300.00 | Federal income tax payable | $2,600.00 |
| Prepaid insurance | $5,500.00 | Overdraft | – |
| Total current assets | $55,200.00 | Customer deposit | $900.00 |
| Pension payable | $720.00 | ||
| Fixed assets: | Unions pay dues | – | |
| land | $150,000.00 | Medical expenses paid | $1,200.00 |
| building | $330,000.00 | Business tax payable | |
| Less depreciation | $50,000.00 | Total liabilities | $24,950.00 |
| Pure land and buildings | $430,000.00 | ||
| Long-term liabilities: | |||
| device | $68,000.00 | Long-term loans | $40,000.00 |
| Less depreciation | $35,000.00 | mortgage | $155,000.00 |
| Clean equipment | $33,000.00 | Total long-term liabilities | $195,000.00 |
| Total liabilities | $219,950.00 | ||
| Owner’s Equity: | |||
| Common stocks | $120,000.00 | ||
| Owner – Painting | $50,000.00 | ||
| Retained income | $128,250.00 | ||
| Overall owner’s interests: | $298,250.00 | ||
| Total assets | $518,200.00 | Liabilities and equity | $518,200.00 |
Read also: Definition, Type, and Importance of Finance
For a startup business, it is best to have an accountant do your first balance sheet, especially if you are not familiar with corporate accounting. A few hundred dollars in accountant time may pay for their own expenses by avoiding problems with the tax authorities. You may also want to browse the balance sheet with your accountant after any significant changes to your business.
If you use accounting software, the balance sheet is easy to execute. Accounting software designed for small businesses can track all your accounting information and automatically generate balance sheets, cash flow statements and other reports as needed.
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