Balance Sheet...Explained

Now that we have covered some bookkeeping issues many businesses have, we will dive into some basics about bookkeeping. While bookkeepers are onboard to reconcile and categorize transactions, they can provide much more benefit to your business. Having someone designated to do only bookkeeping tasks will enable these benefits to shine through. Outsourcing this task to someone who handles other businesses is a way to get the best bang for your buck.

Monthly reports that bookkeepers can provide you with can show you how your business is performing, how much money you have in the business, and areas in which your business could improve. All three together are very important to get a clear picture of the financial health of your business. The first of these reports we will talk about today is the Balance Sheet.

The Balance Sheet is a snapshot of the financial state of a business at a particular point in time. The date of this snapshot can be found in the heading of the report. The contents are only accurate for that day. As we get further into the explanation you will understand why.

The foundation to accurate accounting begins with the accounting equation. All business owners need this to be accurate in bookkeeping. The equation is:

 

Assets=Liabilities+Equity.

Basically, in layman’s terms, this is:  

 

What you Own (assets) = What you Owe (Liabilities)+ What’s left Over (Equity).

The three O’s can help keep this sorted out in your mind. With that equation in mind, let’s go over what is included on the balance sheet and why this can be a powerful tool in determining the health of your business.

Assets

The first items listed on the balance sheet are the Assets. These are the things your business owns. A business has current assets and noncurrent assets. The difference between the two is the length of time it will take to turn the asset into cash. Current assets can be turned into cash within one year. This can include cash, obviously, inventory, supplies, accounts receivable, and prepaid insurance. Noncurrent assets are assets that will take longer than a year to turn into cash. These may include investments, land, buildings, equipment etc. These items are things the business owns that can add value to the business.

Liabilities

Now, let’s go to the other side of the equation. We will begin with liabilities. Liabilities include everything the business owes. As with assets, liabilities can be considered current and noncurrent. This refers to the amount of time it will take to pay off the liability. A current liability can be paid off within one year, and a noncurrent liability is one that will take longer than one year to be paid. Current liabilities can include the current portion of  long term debts, bank debts, accounts payable, wages payable, taxes, rent, utilities, etc. Noncurrent liabilities include long term debts, pension fund liabilities, deferred tax liabilities. These liability items are the monies owed to someone outside the business.

Equity

Next, we add equity to the liabilities. Equity is what we have left over. This is sometimes referred to as shareholder’s equity, or stockholder’s equity. This is the amount of money that is attributable to the business owner. Since you can determine equity by subtracting liabilities from assets, equity is sometimes referred to as “net assets”.

Interpreting the Balance Sheet

As I mentioned previously, the balance sheet is a snapshot of the financial state of the entire business at a particular time. This is a very comprehensive view of the business and possibly the most important report of the three. Keep in mind, the information on this sheet can change daily. The best way to use this tool is to compare it to previous reports. This will give you a broader picture of how the business is performing. There are two other reports that we will discuss next which complement this report to give you a broad view of your business. These reports are the Income Statement and the Statement of Cash Flows. You should be viewing these each month as tools to show you in which direction your business should be moving.