The balance sheet is a fundamental accounting report and forms the basis for many other reports. A balance sheet is a financial “snapshot” of your business at a given date in time. It includes your assets, liabilities, and your business’s net worth (also known as equity).
The balance sheet will tell you about the financial health of the business. It will tell you about the companies liquidity, which means how quickly you can turn your assets into cash to pay bills and other liabilities. The balance sheet will tell you how much the owners have invested in the company and how much of the business is funded by creditors. It can tell you if the company has enough money to continue to fund its own growth or whether it is going to have to take on more debt. The balance sheet will tell you if you have too much inventory and if you are collecting money from customers in a reasonable amount of time.
This information can be found by looking at the financial ratios of the business. Comparing these financial ratios to the ratios of other companies in the same business will give you a benchmark to strive for when managing your business.
The basic balance sheet formula is Assets = Liabilities+ Equity.
This equation must balance. If the equation does not balance then an error has been made that needs to be corrected. Assets are what is owned by the company at the amount paid for the assets (At historical cost not at fair market value). Assets include cash, inventory, accounts receivable, equipment, buildings, etc. Liabilities are the debts of the company. These include accounts payable, bank debt, prepayment by customers, taxes and wages owed. Equity is earnings (income) of the company retained for business growth plus investment by the owners.
Knowing how to interpret your business balance sheet is important for the effective management of your business.
A balance sheet is one among many other reports that we prepare and interpret for small business owners.