A balance sheet is a snapshot of what your business owns, what it owes, and the amount invested. The balance sheet shows your businesses worth and financial position at a given time.
There are 3 main components to the Balance sheet. These components are assets, liabilities, and equity. The basic equation is:
Assets = Liabilities + Equity
Lets start with Assets! Assets are things that a company owns and are sometimes referred to as the resources of the company. They are separated into two main categories, current and long-term assets.
Current assets are those assets that you expect to either convert to cash or use within one year, or one operating cycle – whichever is longer. Examples of current assets include cash, accounts receivable, and inventory.
Long-term assets are those that you use in the operation of your business and that will continue to offer benefit beyond a single year or operating cycle. Examples of long-term assets include buildings, machinery, equipment. Many long-term assets are amortized as they are used.
Liabilities are amounts that the business owes and will have to settle in the future. Just like Assets, there are two main categories, current and long-term liabilities.
Current liabilities are those that are expected to be settled within one year, or within one operating cycle-whichever is longer. Some examples of current liabilities include accounts payable, income taxes owed, and current portions of longer term liabilities.
Long-term liabilities include ongoing commitments such as loans, mortgages, finance leases and other long-term financing arrangements.
Equity is “what is left over”, or the net worth of your business. It shows what is invested in the business by its owners.
Importance of the Balance Sheet
Many business owners don’t view their balance sheet on a regular basis, and therefore are not in tune and informed of the company’s financial standing. Stay ahead of the game, know the balance sheet and use it as a tool!
Do you have questions about your balance sheet? Do you need help with your bookkeeping or accounting? Contact us today!