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.

Balance Sheet, Assets and LiabilitiesA 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

This report is called a Balance Sheet because :

TOTAL ASSETS = TOTAL LIABILITIES PLUS OWNER’S EQUITY

In the case of a nonprofit, Owner’s Equity is replaced by Fund Balance. The accounting is the same.

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