Understanding the Balance Sheet
The Balance Sheet allows you to see your assets, liabilities and owner equity/retained earnings as of a specific date in time. This provides you with a snapshot of your small business’s net worth.
In this blog post, we’ll share the basics that you’ll need to know so you can read a balance sheet. Typically, it is divided into three main parts:
Assets are the things your business owns that have monetary value. They typically include cash, stocks, accounts receivable, prepaid expenses, inventory, and equipment or property.
Liabilities reflect all the money your business owes to others. These typically include short-term notes payable (including lines of credit), current maturities of long-term debt, accounts payable, accrued payroll and other expenses, taxes payable, long-term debt and notes payable.
Owner’s Equity/Retained Earnings
Owner’s Equity, also known as retained earnings, is the money you would have left over if you add up all of the resources your business owns (the assets) and subtract all of the claims from third parties (the liabilities).
Also, the balance sheet will most often be organized according to the following equations:
Assets - Liabilities = Owners’ Equity
A balance sheet should always balance. If it doesn’t balance, it’s likely the document was prepared incorrectly due to incomplete or missing data, incorrectly entered transactions, errors in currency exchange rates or inventory levels or miscalculations of depreciation.
Preparing and understanding your company financial statements is an important part of being a small business owner as it keeps you informed of your financial standing. The balance sheet is particularly a helpful financial tool for businesses that understand how to use it properly.
We can often tell more about an organization from their balance sheet than from their profit and loss. If you need help preparing your balance sheet or profit and loss feel free to reach out to our team.