Getting to know your balance sheet

November 3, 2017 -  By
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Learn what your balance sheet reveals about your business.

The balance sheet is an important report in a business’ financial statements. Unfortunately, many small business owners never look at this report. Usually, it’s because they don’t understand the report or they think it doesn’t show them anything in terms of profitability. However, this is an important report for several reasons:

  • If you’re the owner, these are your numbers. If you don’t understand them, you want to, so it benefits you to ask someone.
  • The report often shows mistakes people make in QuickBooks.
  • The report shows the overall health of a business and can warn you of problems that might not be apparent in your profit-and-loss statement. Wouldn’t you like to know?
  • Lending institutions might take a close look at this report when determining whether they’ll lend and how much they’ll lend, so it’s beneficial for you to understand what they’ll see and use to determine your loan.

A summary of balances

A balance sheet is like a snapshot—it represents one date in time. The numbers represent balances, and because balances change daily, a balance sheet only represents one point in time versus a range. There are three parts to a balance sheet—what you own (assets), what you owe (liabilities) and your net worth (equity).

I. Assets

1. Current (usually one year or less). Most balance sheets start with cash balances, and these typically represent what you have in the bank minus any uncashed checks that could reduce your account once they come in. If you invoice customers but haven’t been paid, that’s considered an asset because it’s owed to you. Typically, this is known as your accounts receivable. Employee advances or other loans payable to your business also are frequently listed here.If you stock and sell products, the cost of unsold products would be in an inventory asset account.

2. Fixed. If you own equipment, furniture, cars or trucks—or something similar that lasts for years—you’ll have a balance in fixed assets. If it’s been a while since you’ve purchased them, you probably have an accumulated depreciation (the total you’ve depreciated throughout the years). When you subtract your accumulated depreciation from your original cost, you get a net value for your fixed asset.

3. Other—security deposits, prepaid insurance, etc. You’ll also have a total for all your assets.

II. Liabilities

Liabilities are monies you owe others, such as taxes,vendors or employees.

1. Current (due in one year or less). These include:

  • Accounts payable—day-to-day money you owe to suppliers and independent contractors, or for utilities;
  • Credit cards—if you set up credit cards as an account in QuickBooks, they’re listed here;
  • Line of credit (if you owe);
  • Payroll taxes you owe;
  • Sales tax; and
  • Short-term loans (due in less than a year).

2. Long term (more than a year).
If you have bank loans, they usually each have a separate account like a bank account does. Each bank loan account represents the principal due on a loan. The interest you pay goes to an expense on your profit-and-loss report.

III. Equity

Equity is the section that varies the most depending on how your business is set up.

  • If your business is a corporation, a common stock account represents the original amount of money you put into the business. It will match the articles of incorporation you drew up when you incorporated. This amount will rarely change.
  • If your business is a partnership, the equity section will include an account for each partner that represents his balance in the firm, which is the net amount of money he’s put into the business over the years plus or minus the business income or loss through the years.
  • A paid-in capital account is how much additional money you’ve put in or taken out of the company beyond the common stock balance.
  • A retained earnings account reflects accumulated profit or loss through the years of operation.
  • The net income figure is the bottom line on your profit-and-loss statement.

Balanced balance sheet

If you take a closer look at the balance sheet and take your total assets (what you own) and subtract your total liabilities (what you owe), you’re left with your equity (net worth). The way it’s presented on the balance sheet is your assets equal your liabilities plus equity—always. So take a look at your balance sheet, andsee what you notice about your business.

Muir is a green industry accountant with Muir & Associates. Reach her at mmitchmuir@muirassoc.com.
Illustration: ©istock.com/D3Damon

This article is tagged with , and posted in 1017, Business Planner 2018, Featured
Monica Muir

About the Author:

Monica Muir is a Green Industry accounting expert with Muir & Associates.

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