ACCOUNTING 101: the BASICS, BALANCE SHEET

As part of our Accounting 101: The Basics series, we will be going over some of the reports that are important to review for your business more in detail. The next report to review as a business owner is the Balance Sheet. Let us dive into what is the Balance Sheet report and why this report is essential for your business. Lastly, let us break down some details about this report to consider.

“Let us dive into what is the Balance Sheet report and why this report is essential for your business.”

What is THE BALANCE SHEET report:

In simple terms, the Balance Sheet which is also known as a statement of financial position, shows what a company is owed and what it owes in any given period that you choose. Ultimately, it shows a company's standing position and what the company is worth. How does it do that? By taking your company's business equity, subtract your liabilities or also known as what your company owes, from everything it owns or also known as assets. This report allows you to summarize and review key points of your business.

details of THE BALANCE SHEET report:

Now that we know what the Balance Sheet report is, let us go over some important details in order to understand this report more from top to bottom:

Assets: This section of the Balance Sheet is broken down usually into what is current and non-current. Let us go over some of these details:

• Current Assets: This is what is expected to be liquidated into cash within one year of the Balance Sheet date. This can be Inventory, Accounts Receivables, Cash, Cash Equivalents, Pre-paid Liabilities, Marketable Securities, Short and long term investments & Other Liquid Assets.

• Non-Current Assets: These are long term investments that were made by the business. These investments will take longer then a year to liquidate into cash. Such examples of these types of assets are buildings, land, equipment, machinery, vehicles, patents & trademarks.

Liabilities: Just like assets, liabilities are also broken down into current and long term. Liabilities are what the business owes and is obligated to pay. Let us go over each:

• Current Liabilities: Current liabilities are what the company owes or is expected to pay within a year. Categories that fall under Current liabilities are: Accounts Payable, Wages, Loans expected to be paid within the year time frame, and taxes owed.

• Long Term Liabilities: This is what the business owes but expected to be paid in a period longer then a year. Examples of long term liabilities are loans that will take longer then a year to pay, bonds issued by the business.

Owner's Equity: In simple terms, this is what the company is worth represented by the formula:

Shareholder's Equity = Assets - Liabilities

Equity can include multiple parts. Depending on the business structure that you have, Owner's equity or also known as Shareholder's equity is the amount left over if all assets sold and liabilities have been paid. Ultimately, what the net worth of the company is.

Common Stock / Preferred Stock: This will be the value of the business stock which are both calculated in their own way. Common stock is calculated from par value multiplied by number of shares issued while Preferred stock is an arbitrary par value.

Retained Earnings: Rather then being distributed to the owner's as dividends, this will be income that the business retains or keeps to reinvest in the business to pay off debt. What is left over is then distributed.

WHY is the BALANCE SHEET IMPORTANT:

This report is essential for any business as it informs the business owner and any shareholders a picture of how the business is doing. If your in trouble, the Balance sheet is a perfect indication. Even more importantly, the Balance Sheet shows the true worth of your business. If you want an investor, or selling your business, this report will give them the financial position of the business. How the operations of the business is doing, the liabilities that you owe and the assets that you own. There are free software's out there to help your business organize your financials and be able to review these reports. Don't know where to start? JNA can assist. Book your FREE initial consultation.

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