It’s time to tackle the balance sheet, the second most commonly used report by business owners. It’s called a balance sheet because each side must equal the other.
The balance sheet is a snapshot of your business on any given day, whereas the income statement reports on a given period.
Assets = What is OWNED
Assets are items of value that the company owns. Accounts such as current assets, long-term assets (fixed assets), investments, and intangibles make up the asset side of a balance sheet.
Intangibles: Copyrights, trademarks, licenses, patents and the company’s goodwill (standing in the community)
Liabilities = What is OWED
Liabilities are a company’s debts, obligations, customer deposits, etc. that are the result of a past transaction.
Equity = What is LEFT OVER
Subtract total liabilities from total assets, and you end up with the company’s net worth, also known as equity.
Equity accounts will differ depending on business structure. For instance, sole proprietor’s and LLC cannot issue stock. Retained earnings above may be titled be partners’ capital, or members’ equity. Check with your bookkeeping professional to find out which is appropriate for your situation.
The Balance Sheet is Connected
As mentioned in the article about income statements, these two reports are linked. Retained earnings are calculated using the bottom line (Net Income) of the income statement. The cash flow statement is constructed using information from both reports. Because of this crossover, 100% accurate in each report is paramount to creating a sound financial picture of your business.
Understanding the balance sheet is easy. If you remember the accounting equation, Assets = Liabilities + Equity. Understanding is also integral to your success. Regular review of the “big three” reports, either on your own or with the aid of your financial adviser needs to occur regularly. If you need help analyzing them, please consult a professional.