A balance sheet is a complete description of the financial health of the business. Preparing a balance sheet will help you to evaluate the assets of your company when stacked against its liabilities to estimate the financial health of your business.
“Terribly important to draw up a balance sheet every now and then, debits and credits. Decide what’s important, what’s worth fighting for.” Lynne Reid Banks
Key Parts of a Balance Sheet
- Basic Equation
This equation is the fundamental concept of the balance sheet. It states the liability and owner’s equity of a business are equal to the total sum of its assets.
Assets = Liabilities + Owner Equity
All balance sheets are based on same formula.
- Assets Calculation
Investments, money and the financial resources that a company holds are termed as its assets. These assets are stated on the balance sheet by their liquidity, basically their value if immediately converted to cash. Your company can possess two types of assets:
Current Assets
Current assets are those which can be transformed into cash within a year or less. They include:
- Cash: The total money in your current and saving accounts
- Securities: Stocks, investments, saving bonds
- Receivable Accounts: Money the company is owed by a client
- Inventory: Current stock in inventory
- Insurance: Business insurance coverage
Fixed Assets
Fixed assets are long-term material and immaterial assets, excluding depreciation, that can be sold or hold value down the line. They include:
- Supplies: Business operation commodities like machinery, industrial equipment, computers, transportation, and furniture etc.
- Property: The building owned by the business
- Intangible Assets: Trademarks, patents, copyrights to retain intrinsic values etc.
- Estimation of Liabilities
Liabilities are obligations and debt payable to another entity. Liabilities are stated on the balance sheet in order of the shortest deadline first for the repayment. For example those which are to pay in 30 days will before those which are due in 90 days. Just like assets, liabilities can also be current and fixed types based on how long it is until they are due. Current assets are due in a year or less and fixed anything over a year.
Current Liabilities
- Payable Accounts: Money to be paid to partners and investors
- Credit Cards: Credit card dues of the company
- Line of Credit: Money owed to the bank for business operations
- Taxes: State and Federal Taxes to pay within one year
- Employee Payroll: Employee wages, incentives and medical insurance
- Pending Revenue: Revenue expected to be collected for the sale that yet to be delivered to the customer
Fixed Liabilities
- Mortgages: Mortgage to be paid for building and property
- Bonds: Long-term Bonds payable to the government
- Employee Pension: Employee pension owed by the company
- Shareholder’s Loan: Finance provided by the shareholders
- Equity Assessment
Equity is the value of company’s capital. The basic equation I mentioned above can also be used to calculate the owners’ equity i.e.
Owner Equity = Liabilities – Assets
If this equation returns negative figures, it can be dangerous for the business growth and make it difficult to secure finance. Equity includes:
- Opening Balance: The primary investment in the company
- Capital Stock: The stock a company issues
- Dividends: Profit paid to the shareholders
- Proprietors Draw: Revenue used by the company’s Proprietor
- Remuneration: Total sum of company’s earning since the beginning.
In conclusion:
The balance sheet is an integral part of your complete financial report and is essential to use secure financing. Luckily for you, they are relatively easy to prepare for your small business, even without an accountant. Keeping a current balance sheet can help you make important decisions and make them correctly.
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