In part 2 of this 3-part series, we will be taking a closer look at the balance sheet. The balance sheet is one of the 3 main financial reports and provides valuable information about the current value of any business.
The totals for each account or item on the balance sheet is the net balance at the end of the month. You can think of it as a snapshot in time rather than a total for the month/year like the statement of cash flows and the income statement. It shows you the value on the day that it is pulled and that data is likely from change day-to-day.
There are 3 main sections in the balance sheet:
Assets
Liabilities
Owners equity
Assets
In its most simple form, assets are what the business owns. Some of the most common assets listed on the balance sheet are cash, supplies, inventory, equipment, buildings, and bank accounts.
These assets are often further split into 3 sections; current, fixed, and other.
Current assets are assets that could easily, and are expected to, be turned into cash within a year. This obviously includes cash, but can also include things like accounts receivable and inventory.
Fixed assets are used in the production of the products or services that your business provides. You will see things like buildings, equipment, and land in this section. These are the assets that a business will hold onto for longer than a year as they are required for the business to function.
Other assets are exactly that. Assets that don't really fit into the other two categories. This is the category where you would find investments or the estimated value of a patent.
Liabilities
Liabilities are what the business owes to the outside world. This includes any loans or outstanding invoices from suppliers that will need to be paid in the future.
Liabilities are broken down into two additional sections; current liabilities and long-term liabilities.
Current liabilities are those that will be met or satisfied within 1 year. These will include any accounts payable, salaries payable, or the current portion of an long-term debt. Any debt that you can reasonably expect to pay off in a year or less.
As you might expect, long-term liabilities are the liabilities that will be due or paid beyond the year. You would see things like a mortgage in this section since it isn’t expected that the debt would be paid off within a year.
Owners equity
Owners equity is the the difference between assets and liabilities. This section includes the owner's capital and owner’s draw accounts. You can think of the owners equity section as the value of the business; it is what is left after you subtract total liabilities from value of the assets.
Overview
The balance sheet shows the business owner what their business is worth on a specific day. It quantifies the total value of assets at a moment in time, then subtracts the total value of money owed to others to give you the total current value of the business itself.
The most value from the balance sheet is provided by comparing it to the balance sheets from previous periods to get a feel for the longer term trends within the business. If possible, comparing it to the balance sheets of similar companies in the same industry can provide a lot of insight on where it stands in comparison to your competitors.
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