The Balance Sheet is a primary report in your business’ financial statements. Many small business owners are unsure of what all the numbers mean on this report, so here are some basics.
A Summary of Balances
One main characteristic of a balance sheet is that it represents a snapshot of a business’ financial condition as of a specific date, for example, 12/31/2014. The numbers represent balances at a point in time versus a range of dates.
The balance sheet is made up of three parts, and the easiest part to understand is Assets (what you own). Most balance sheets start off with Cash balances, and these typically represent what you have in the bank less any uncashed checks that will reduce your account once they come in.
If you have invoiced customers but not collected, you will see the total amount owed to you as an Accounts Receivable balance on your balance sheet.
If you sell products, the cost of all products that you have not sold yet and that you may have stored in a warehouse is in the Inventory account.
If you own equipment, furniture, trucks or something similar that lasts for years, you will have a balance in Fixed Assets for what you paid for these items. If you’ve owned them for a while, you will also see an offsetting Depreciation account, and when you net the two, your total fixed asset values are reduced.
All of the above are assets and they are listed as the first section of a balance sheet.
What You Owe
If you owe money to vendors, employees or for loans or taxes, then it will show in the Liabilities section which is the second of three major sections of a balance sheet. Day-to-day unpaid bills are shown as Accounts Payable.
If you have credit cards or bank loans, they will usually each have a separate account like a bank account does. Each Credit Card or Loan Payable account represents the principal owed (the interest you pay goes to another place).
The final section of the balance sheet is Owner’s Equity. This section will vary depending on the type of entity your business is set up as. For example, if your business is a corporation, there will be a Common Stock account which will represent the original amount of money you put into the business, which should match the Articles of Incorporation that you drew up when you incorporated. This amount will rarely ever change for the life of the business.
There is also usually an account called Paid-in Capital which is how much additional money you’ve put in or taken out of the company beyond the common stock balance.
All businesses will have a Retained Earnings account. This reflects accumulated profit (or loss) through the years of operation.
If your business is set up as a partnership, the equity section will include an account for each partner that represents their balance in the business, which is the net amount of money they have put into the business over the years plus or minus the business income or loss through the years.
Keeping It Simple
These are the very basics of the numbers represented on your balance sheet. If you have questions about any of the numbers on your financial statement, please feel free to reach out and ask.