Balance Sheets
A
balance sheet is a snapshot of a business’ financial condition at a specific
moment in time, usually at the close of an accounting period. A balance sheet
comprises assets, liabilities, and owners’ or stockholders’ equity. Assets and
liabilities are divided into short- and long-term obligations including cash
accounts such as checking, money market, or government securities. At any given
time, assets must equal liabilities plus owners’ equity. An asset is anything
the business owns that has monetary value. Liabilities are the claims of
creditors against the assets of the business.
What is a balance
sheet used for?
A balance sheet helps a small business owner quickly get a handle on the financial strength and capabilities of the business. Is the business in a position to expand? Can the business easily handle the normal financial ebbs and flows of revenues and expenses? Or should the business take immediate steps to bolster cash reserves?
A balance sheet helps a small business owner quickly get a handle on the financial strength and capabilities of the business. Is the business in a position to expand? Can the business easily handle the normal financial ebbs and flows of revenues and expenses? Or should the business take immediate steps to bolster cash reserves?
Balance sheets can identify and analyze trends, particularly in the area of
receivables and payables. Is the receivables cycle lengthening? Can receivables
be collected more aggressively? Is some debt uncollectable? Has the business
been slowing down payables to forestall an inevitable cash shortage?
Balance sheets, along with income statements, are the most basic elements
in providing financial reporting to potential lenders such as banks, investors,
and vendors who are considering how much credit to grant the firm.
1. Assets
Assets
are subdivided into current and long-term assets to reflect the ease of
liquidating each asset. Cash, for obvious reasons, is considered the most
liquid of all assets. Long-term assets, such as real estate or machinery, are
less likely to sell overnight or have the capability of being quickly converted
into a current asset such as cash.
2. Current assets
Current
assets are any assets that can be easily converted into cash within one
calendar year. Examples of current assets would be checking or money market
accounts, accounts receivable, and notes receivable that are due within one
year’s time.
• Cash
Money
available immediately, such as in checking accounts, is the most liquid of all
short-term assets.
• Accounts receivables
This
is money owed to the business for purchases made by customers, suppliers, and
other vendors.
• Notes receivables
Notes
receivables that are due within one year are current assets. Notes that cannot
be collected on within one year should be considered long-term assets.
3.
Fixed assets
Fixed
assets include land, buildings, machinery, and vehicles that are used in
connection with the business.
• Land
Land
is considered a fixed asset but, unlike other fixed assets, is not depreciated,
because land is considered an asset that never wears out.
• Buildings
Buildings
are categorized as fixed assets and are depreciated over time.
• Office equipment
This
includes office equipment such as copiers, fax machines, printers, and
computers used in your business.
• Machinery
This
figure represents machines and equipment used in your plant to produce your
product. Examples of machinery might include lathes, conveyor belts, or a
printing press.
• Vehicles
This
would include any vehicles used in your business.
• Total fixed assets
This
is the total dollar value of all fixed assets in your business, less any
accumulated depreciation.
4. Total assets
This
figure represents the total dollar value of both the short-term and long-term
assets of your business.
5. Liabilities and owners’ equity
This
includes all debts and obligations owed by the business to outside creditors,
vendors, or banks that are payable within one year, plus the owners’ equity.
Often, this side of the balance sheet is simply referred to as “Liabilities.”
• Accounts payable
This
is comprised of all short-term obligations owed by your business to creditors,
suppliers, and other vendors. Accounts payable can include supplies and
materials acquired on credit.
• Notes payable
This
represents money owed on a short-term collection cycle of one year or less. It
may include bank notes, mortgage obligations, or vehicle payments.
• Accrued payroll and
withholding
This
includes any earned wages or withholdings that are owed to or for employees but
have not yet been paid.
• Total current liabilities
This
is the sum total of all current liabilities owed to creditors that must be paid
within a one-year time frame.
• Long-term liabilities
These
are any debts or obligations owed by the business that are due more than one
year out from the current date.
• Mortgage note payable
This
is the balance of a mortgage that extends out beyond the current year. For
example, you may have paid off three years of a fifteen-year mortgage note, of
which the remaining eleven years, not counting the current year, are considered
long-term.
• Owners’ equity
Sometimes
this is referred to as stockholders’ equity. Owners’ equity is made up of the
initial investment in the business as well as any retained earnings that are
reinvested in the business.
• Common stock
This
is stock issued as part of the initial or later-stage investment in the
business.
• Retained earnings
These
are earnings reinvested in the business after the deduction of any
distributions to shareholders, such as dividend payments.
6.
Total liabilities and owners’ equity
This
comprises all debts and monies that are owed to outside creditors, vendors, or
banks and the remaining monies that are owed to shareholders, including
retained earnings reinvested in the business.
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