What Is a Balance Sheet?
A balance sheet is a snapshot of what your business owns (assets) and what it owes (liabilities and owner’s equity) at a given point in time. It’s the foundation for many financial ratios, allowing you to analyze and compare your business’s efficiency and profitability. The balance sheet format varies depending on where your company is located and which accounting standards it follows, but most balance sheets have assets listed on the left side with liabilities and shareholder’s equity detailed on the right. The total dollar amount on each side always equals the other, ensuring that the balance sheet is balanced and in equilibrium.
Assets are everything your business owns that has a monetary value, including concrete items such as cash and inventory, as well as intangible things like prepaid expenses and money owed by payers (accounts receivable). Liabilities are the debts your company owes to others, including suppliers, employees and lenders. Owner’s equity is the share of profit that your shareholders have invested in your business. This primarily includes funds that investors have paid in, but can also include the accumulated profits of your company (accumulated other comprehensive income) and any dividend payments made to shareholders.
In the example below, which complies with International Financial Reporting Standards, assets are displayed in descending order starting with those that can be converted into cash most quickly. This enables you to spot the most liquid assets at a glance. It also displays two years, letting you see how your business’s assets have changed over time. Liabilities and shareholder’s equity are displayed in the same manner, with the most liquid liabilities listed first.
Both of these sections have sub-categories that break down the types of liabilities and equity your company has. For example, current liabilities include accounts payable and notes payable due within the year and other short-term loans, while noncurrent liabilities are long-term loans and the remaining portion of your deferred tax liability. The total shareholder’s equity section then reports common stock value, retained earnings and accumulated other comprehensive income, all of which reconcile to your total assets on the right side of the balance sheet.
The balance sheet shows a moment in time, but it also allows you to compare your company’s status with other companies over time. For instance, you can use it to find out if your business is growing or if your pressing financial obligations are on the horizon. You can also track your progress by comparing the balance sheet from one reporting period to another to spot any trends, says the Small Business Administration.
The most important thing to remember about the balance sheet is that it’s deeply connected to other financial statements. That’s why it’s so crucial for entrepreneurs to understand the basics of balance sheet creation, or consult a professional accountant to avoid costly mistakes. Drew Gerber, founder of a Georgia firm that helps small businesses market themselves, warns that it’s easy to get overwhelmed by the number of details involved in creating a balance sheet. He suggests hiring an accountant as soon as you set up your business, even if you only need help setting up the necessary accounts and adjusting them over time as your company grows. Bilanz