The balance sheet is an important report in your business’s financial statements. Many small business owners are unsure of what all the numbers mean on this report, so here’s a very brief rundown.
A Summary of Balances
One big characteristic of a balance sheet is that it represents one date in time, for example, 12/31/2016. The numbers represent balances, and since these change daily, a balance sheet only represents one point in time versus a range.
Three Parts
There are three parts to a balance sheet, and the easiest part to understand is the assets, or what you own. Most balance sheets start with cash balances, which represent what you have in the bank minus any uncashed checks that could reduce your account once they come in.
If customers owe you money that you have invoiced but not yet collected, you might see an Accounts Receivable balance on your balance sheet.
The cost of all the products you haven’t sold yet, and that you may have stored in a warehouse, is in the Inventory account.
The equipment, furniture, cars, trucks, etc. that last for years will have a balance in Fixed Assets for what you paid for these items. If it’s been a while since you’ve bought them, you may have a Depreciation account; when you net the two, your Fixed Assets values are reduced.
All of the above are assets and they are listed in the first section of a balance sheet.
What You Owe
If you owe money for taxes, to vendors, or to employees, it will appear in the Liabilities section, which is the second section of a balance sheet. Day to day unpaid bills are in an account called Accounts Payable.
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 another place).
Equity
The final section of the balance sheet is Owner’s Equity. It is the section that will vary the most depending on how your business was set up. 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; it will 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.
A corporation will also 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 firm. This 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, or if you need help with your bookkeeping in general, please don’t hesitate to contact Innovative Financial Services, LLC today.
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