One of the reports used by a small business to assess their financial story is the Balance Sheet. The Balance Sheet is a financial report listing the assets, liabilities, and owner’s equity (or net assets) of an organization.
Assets = Liabilities + Owner’s Equity (Net Assets)
The balance sheet is important because it reports on what the organization owns, what it owes, and its net value.
The report may also be referred to as a Statement of Financial Position.
The values reported on the Balance Sheet are as of a specific point in time.
Sections of the Balance Sheet
Assets – what a company owns
- Cash – in the bank now
- Accounts Receivable – money owed TO the organization
- Investments – savings, inventory, raw materials
- Fixed Assets – tangible property or equipment used in operations
- Other Assets – prepaid expenses
Assets can be further defined as either short term/current or long term/non-current. Short-Term assets can be easily converted into cash or are typically used within twelve months. Long-Term (non-current) assets have a “life” of longer than one year, either by use or conversion into cash.
Fixed assets are tangible items with a use of longer than one year. As the fixed assets are used, their value decreases. Depreciation is the calculation recorded to lower the holding value of the fixed assets. When an asset is sold, the amount received may not be equal to what is recorded in the books. Depreciation is an estimated calculation. Generally accepted tables and guidelines are available to help with these calculations.
Liabilities – what a company owes
Debt – credit card, loans, money borrowed
- Sales Tax – collected from customers due to the government
- Payables – expense due, and not yet paid
- Customer Credit and Gift Cards
- Unearned Revenue
Owner's Equity (Net Worth or Net Assets)
The value left after Assets are reduced by the outstanding Liabilities. The amount that the owner could put into their pocket after settling their debts.
Assets – Liabilities = Owner’s Equity (Net Assets)