A balance sheet is a financial snapshot at a particular point in time. It is what a small business owns and what it owes. It highlights SME assets, liabilities and equity.
It’s another leg of the small business financial crutch.
What are Balance Sheets in Accounting?
A balance sheet shows your financial position and at the same time your financial health. These financial statements include both non-current and current assets, cash and cash equivalents, accounts receivable and the like.
The net assets are what is left when you deduct liabilities. The liabilities and equity work as part of the balance sheet equation which goes like this: Assets = Liabilities + Equity
What is the purpose of a balance?
The balance sheet provides a clear picture of your financial situation. This is only relevant for the income statement.
Main components of a balance sheet
Breaking this financial statement down into parts makes it easier to understand. These are the parts that make balances work.
These are also known as resources. When you own an asset, you expect that there will be an advantage in the future. Hence, things like accounts receivable are included. They generate cash flow, improve sales or reduce costs and there are several categories.
- Current assets – Inventory and prepaid expenses. Things that are paid out within a year.
- Fixed assets – Such as equipment and buildings. Long-term resources.
There are also intangible assets such as trademarks and financial assets such as stocks and bonds.
A company’s liabilities are one of the major takeaways on its balance sheet. These keep a company moving forward. Long-term debt such as interest payments are included and long-term debt includes items such as mortgage payments.
Some small companies are publicly traded. They sell stocks. This is what is left after the total debts are paid.
Balance sheet example
Reading about any of these statements is one thing. Seeing an example helps clarify what’s in print. The one below is from Harvard Business School online.
The above example will help you highlight questionable accounts so that you can arrive at a reasonable net worth.
Preferred shares can be added and these shareholders take precedence. Ultimately, using a template like this will give a good idea of equity. Plus, a template gives you a good foundation to monitor YoY trends and other metrics.
Making a balance
A balance sheet is one of the most important financial statements. Spreadsheets are a commonly used format.
- Choose a reporting period – Balance sheets for public companies are usually quarterly. Fill this in to also report annually on financial health. A common date for a balance here is December 31.
- List current assets – Liquid assets go first, such as cash, and business assets such as inventory are also added. Don’t forget that long-term assets, debt securities, and cash accounts also belong here.
- List the obligations – Add sections for current liabilities and non-current liabilities. This part of your balance needs a total.
- Calculate equity – Shareholders’ equity must be included in this together with the shareholder’s share. The total comes to a sample balance.
- add everything – Sort the numbers for liabilities, equity, and assets. Here’s the formula to fill out this important financial statement. The sum of liabilities and equity must equal total assets.
A monthly balance sheet provides an accurate picture of things like equity, current liabilities and assets of a company. It combines with other financial statements to list financial liabilities in each period.
Analyzing a balance
A company’s balance sheet provides figures on assets, liabilities and how much financial risk you run. It gives business owners a good overview of their operations and some ideas about what needs to be adjusted.
Here are some tips for reading the statistics.
Read the obligations
This is an important part of the balance. Don’t forget short-term items such as creditors and long-term aspects such as borrowing money from a bank loan.
If your SME covers these, you must also add pension fund liabilities and distributions on other long-term investments. All debt obligations must be considered.
Know the assets
The total assets of the company are listed and the inventory that the company owns is a current asset. How much cash and equivalents also need to be analyzed. Balancing assets and liabilities also means looking at fixed assets, such as patents. Depreciation works on these items to ultimately affect net income.
These can be retained earnings at the end of a financial year. Everything should be organized by how current the numbers are.
Financial strength ratios are the main technique and accounting equation used. These are actually a series of formulas that arrive at the debt-to-equity ratio. And others.
Activity ratios are another commonly used tool. It shows how a small business utilizes its assets. Analysts often look at long-term assets and average total assets. Plus how a company manages its short-term receivables. Debt to equity is another ratio along with/or debt to assets and asset turnover.
Remember that equity is placed at the end of the period.
What are the three main types of financial statements?
The information about the three types of financial statements is critical. It is a snapshot of the business activities of an SME.
A Cash flow statement reports on cash flows, what comes in and what goes out. Cash flow statements have three sections, financing, investing and working.
Wondering what an income statement is?
The Profit and loss account shows income and expenses. Additional paid-up capital costs can be found here. This statement is a driver of the other two types.
Finally there is The balance. The book value perspective can be found here, which is basically what the company is worth.
If you’re wondering what an income statement is, it’s expenses and income.
You can learn more from online experts such as the Corporate Finance Institute.
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