The Balance Sheet is a report that is incredibly useful for business owners to use and understand. There are a number of things that the balance sheet does and we will cover many of them here.
Before we start there are a few things you should know about the Balance Sheet. First thing to note, rather than have a date range that this report shows, your bookkeeper will present this report to you “as of” that most recent reconciliation. Reconciliation is something your bookkeeper will do on a monthly basis and is a system of checks and balances to ensure that your data is accurate.
Secondly, Assets should always equal Liabilities + Equity. Always! Finally, there are three main things this report tells the business owner. The Balance Sheet shows what you own, what you owe, and what is left over.
Now let’s take some time going through each section of the Balance Sheet to learn what it is telling you as the business owner.
Assets are property owned by the company that are of value. This can be anything from actual property to equipment and vehicles to cash in the bank account. Your bank accounts will show up at the top of this list because that it your primary asset that is looked at most regularly.
There are two types of assets, current and fixed.
Current assets include anything that is expected to be converted to cash within a year. This would obviously include anything that is already cash as well as any outstanding invoices you are waiting to receive payment for. Invoices awaiting payment are included as assets because that money is due to you even if you have not yet received it.
Fixed assets, as I’m sure you can guess, are purchases that are for long-term use or will not become cash within a year. Land, buildings, vehicles, and leasehold improvements can be included in this category. These items are often depreciated over time and this will be done by either your bookkeeper or accountant.
The next section on the Balance Sheet is liabilities. This includes any debts or financial obligations of the company. One liability seen most often on the Balance Sheet is a Credit Card.
Like the assets, there are both current and fixed liabilities. A credit card would be considered a current liability because it is paid off periodically (hopefully monthly!). Another current liability is your outstanding bills. The cash to pay these bills is still in your account but you are supposed to pay them so the company is liable to pay.
Fixed liabilities would include loans from shareholders, a mortgage, or a Line of Credit. These are long term liabilities that have to be paid back in full over time but not within a year.
The final section on the Balance Sheet is equity. Equity refers to ownership interest in the business. If you have contributed money to get your business going as an Owner Contribution then it will show up here as equity in the business. Also on the Balance Sheet in this section you will see your Net Income for the business. In short, Equity is what is left over after your Liabilities are subtracted from your Assets.
Now you should be able to look at your Balance Sheet and understand what it is telling you about your business with ease! If you ever need to apply for a loan, present to potential investors, or give reports to your CPA for taxes, this report must be present and accurate!
Make sure you have all the information you need when looking at this report by downloading my free Balance Sheet at a Glance PDF.
*Thrive Bookkeeping offers free 1-hour training & review of financial statements on a monthly or quarterly basis to all its clients. Not all bookkeepers do this but it is an invaluable service that is vital to the health and success of your business. Please contact me if you would like to schedule a free 1-hour consultation to discuss your bookkeeping needs