Business 101 : What Is A Balance Sheet?

The simplest explanation is that it lists all the things of value that you own including cash, plus the amount other people owe you (Assets) and subtracts all the money you owe other people (Liabilities). So your personal Balance Sheet might have your house and car, the money in your bank accounts and the loan you made to your brother-in-law on the asset side; and show your mortgage, credit card debt and college loans as liabilities.

A Balance Sheet, also called the Statement of Financial Position, is a cumulative statement of the company’s assets, liabilities and ownership equity¹(or shareholder equity) at a specific point in time. The Balance Sheet will be at a date (e.g. at 12/31/2013) and will often show the current Balance sheet and the one for the same date in the previous year to highlight changes. The Balance Sheet records your profits and losses from your P & L and adjusts the value of your assets and liabilities over the life of the business. (So the loan you have been paying is reduced, the new vehicle you bought is added).

Why Bother With a Balance Sheet?

The Balance Sheet is used by banks and potential investors to help determine the value of your business and assess your ability to pay debt. If you are looking for money you need a Balance Sheet.

Small businesses may produce one Balance Sheet at the end of the fiscal year, or may update the report every month. It is a very useful tool in managing your business because, unlike the P & L which describes a period of time, the Balance Sheet begins at the inception of your business (or whenever you begin to keep this report) and rolls forward, maintaining the flows of assets and liabilities in and out of your business and adjusting the ownership equity to reflect those changes. You might think of it as a running total of everything you own and everything you owe.

Below we will look at the parts of a basic Balance Sheet. These are the most common asset classes but yours may differ depending upon the type of business you own. Again, talk with your accountant.

ASSETS		Items owned by your business including money and money owed to you.
	Current Assets
	Cash & Equivalents	All the cash in all accounts (even petty cash) plus short term investments.
	Accounts Receivable	Money owed to the business.
	Inventory	The items in stock to sell or create a product to sell.
	Deposits & Prepaid Expenses	Deposits on utilities, next year’s insurance premium, etc.
	TOTAL CURRENT ASSETS	Total of items above
	Fixed Assets
	Property & Plant	The value of the real estate and buildings.
	Equipment	The value of equipment
	Vehicles	The value of vehicles
	Intellectual Property or Intangible Assets	This may include a wide range of items from proprietary software to the value of your brand. Talk to your accountant.
	Less Depreciation	Fixed asset classes will show the accumulated depreciation which reduces the value of the asset.
	TOTAL LONG TERM ASSETS	Total of previous 5 items
TOTAL ASSETS		Total of Current Assets and Long Term Assets

LIABILITIES
	CURRENT LIABILITIES
	Accounts Payable	Those usual operating costs which have not been paid at the time the books are closed, typically bills which have been received but not paid.
	Taxes Payable	Taxes owed but not paid.
	Salaries Payable	Payroll not paid at the end of the accounting period.
	TOTAL CURRENT LIABILITIES	Total of 3 items above
	LONG TERM LIABILITIES
	Mortgages	Loans for real estate purchase.
	Loans	Long term loans such as for equipment.
	Notes	Short term loans which will not be paid within the year (e.g. an 18 month computer loan)
	TOTAL LONG TERM LIABILITIES	Total of 3 items above.
TOTAL LIABILITIES		Total of Current and Long Term liabilities.

OWNERS OR SHAREHOLDER’S EQUITY
	Paid in Capital	The total of the money contributed to the business by the owner(s).
	Retained Earnings	The profit or loss from the P & L
	TOTAL EQUITY	Total of 2 above.
TOTAL LIABILITIES & EQUITY		Addition of Total Liabilities plus Total Equity