Understanding The Balance Sheet
Over the next couple of weeks I will begin a series on understanding your financial statements. I will begin with the balance sheet, next will be the income statement and then followed by the statement of cash flows. I will end this series on how to analyze all three financial statements to get an understanding on how your business is doing financially. I truly hope you find this helpful in your business.
The balance sheet is the first of the financial statements. This represents your business’ financial health at the end of a specific date. This can change daily and only represents your business at that moment in time. Most business owners just briefly look it over while not fully understanding what it means for their business.
The basic equation for the balance sheet is: Asset – Liabilities = Equity
Each of those are broke down into further accounts.
Assets are what you own
An asset is anything of value your business controls. Assets are further classified into several accounts.
Current Assets – Cash and other resources that are expected to turn into cash within one year of the balance sheet date
Investments – Funds in this account would be bond sinking funds, funds held for construction, cash surrender value of a life insurance policy or long term investments in stocks and bonds
Property, Plant, and Equipment – Such as land, buildings, leasehold improvements, equipment, furniture, or cars
Intangible Assets – Include copyrights, patents, goodwill, tradenames, or trademarks
Other Assets – Any other assets not included above
Liabilities are what you owe
Liabilities are debts your business owes to other people. Liabilities are broke down into 2 separate areas.
Current Liabilities – Obligations due within one year of the balance sheet date
Long Term Liabilities – Obligations that are not payable within one year of the balance sheet date
Owners’ Equity is what is left over
Owner’s Equity represents the portion of the business that you own free and clear. For example if you were to liquidate all your assets and then paid off all the debts you owed, the amount left over would be your “equity”.
This section will vary depending on what type of business you own. If you are a corporation, you will have a common-stock account. If you have a partnership, you will have separate accounts for each partner. If you have a sole proprietor, you will have an owner’s equity account.
Remember the balance sheet only gives you a picture of your financial health at a moment in time. It is ever changing. Each aspect of the balance sheet works together to give you an idea of how your business is doing financially. Next week we will talk about the income statement. Most business owners are mostly concerned with this financial statement.