What Is a Balance Sheet?
My accountant has always told me a balance sheet is a snapshot of my business assets, liabilities, equity, and net worth; and it can change dramatically from time to time. A basic balance sheet example, if completed accurately, will show all your assets, less your liabilities, plus equity. To be accurate both the assets and liabilities must be equal.
The easiest balance sheet example to understand is one in which assets are listed first and the liabilities and capital (owner equity) follow underneath.
The importance of keeping your balance sheet current and balanced is to inform not only the owners of the business of its financial condition, but banks and lenders also utilize the balance sheet to see if the company is in a stable financial condition to lend money or expand. A good balance sheet will utilize sales and expense revenues from your income statement to show your net profit.
Before we explain the items contained within a basic balance sheet example, visit our Media Room and download and print a copy of our balance sheet template. This template is in a Microsoft Excel format that calculates automatically.
The Elements of a Balance Sheet: Assets
If you take a look at the balance sheet template, you will first deal with assets. Assets are either current meaning true dollars you can turn into real cash or fixed assets. Fixed assets include items like equipment, vehicles, land, buildings and goodwill.
- Current Assets – Here you should list all your cash, account receivables, allowance for bad debts, inventory, all prepaid expenses such as utility down payments, and notes receivables. The sum of all of these equals your current assets. Depending upon the type of business you are in, you may have additional current assets. Some business, such as franchises, can list francishor expected payments as an asset for example.
- Fixed Assets – List your vehicles, furniture and fixtures including office equipment, other equipment, owned land, and buildings. Another common fixed asset is a leased asset or leasehold. If you lease large equipment with the intent to purchase, you are gaining equity with each lease payment. Therefore, it should be listed as a fixed asset. Again, your business may have other items that fall in the fixed asset category depending upon the type of your business. One item under fixed assets is called “good will.” If you buy an existing business, the difference between what you paid for the business and it’s book or financial value is the good will. Your accountant can help you determine good will.
- Total Assets – The sum of your current assets and fixed assets become your total assets at any given time. In our balance sheet example, you will notice that all fixed assets have a place for accumulated depreciation. Understanding how to depreciate assets is a complicated accounting tool. Most businesses allow their accounts to depreciate annually which is the norm in the world of the small business owner.
The Elements of a Balance Sheet: Liabilities
Your liabilities are next to decipher. Here, if you look at the balance sheet template, you will see that there are current and long-term liabilities.
- Current Liabilities – Here list all your accounts payables, sales taxes payable, payroll taxes payable, accrued wages payable, and short-term notes payable. Keep in mind these are not items you’ve already paid, just ones that are due or unpaid. Short-term notes you list here may be agreements to purchase equipment on a 30-60-90 day payment plan. A short-term note is one that will be paid in full in less than one year. Under current liabilities, there is also a space for unearned revenues. Unearned revenues are dollars you received for work you haven’t performed. In other words, it’s still a liability you have yet to complete. The sum of all of these comprises your current liabilities.
- Long-Term Liabilities – These are broken out into two categories, long-term notes (or loans) payable to financial institutions, and mortgages payable. If you are buying the land and building where your business sits, that mortgage loan would fall into the mortgages payable category.
- Total Liabilities – The sum of your current and long-term liabilities equal your total liabilities.
The Elements of a Balance Sheet: Owner’s Equity and Capital
Finally, in our balance sheet example, you will see a section for capital. This includes owner’s equity and net profits made at the time the balance sheet was created. The two of these equal your total capital.
- Owner’s Equity – List here all real cash invested into your business, including the purchase price if you bought an existing business. Owner’s equity also includes your retained earnings from a prior month or year. Retained earnings are comprised of what equity is left after dividends and distributions are paid out to stockholders at the end of each year. Read more about retained earnings in How to Calculate S-Corp Retained Earnings, as they are different. Common stock or the amount each investor paid for stock may also be listed in the owner’s equity section.
- Net Profit – Your income statement should keep a running total of your net profits. Net profits are determined by sales revenues, less all costs associated with selling your product or services. Fixed expenses are also included in the income statement and consist of items like telephone, utility, rent, insurance, and advertising expense. Take your current net profit and place it in this section.
- Total Liabilities and Capital – This is the sum of all of your liabilities plus your capital and net profits.
Balance Sheet Determinations
As I stated at the start of this article, your balance sheet bottom line must equal mathematically. The amount the asset section and the amount of your liability section, plus your capital or owner’s equity should be the same number. If it doesn’t balance, you need to determine where the math is incorrect.
Keep in mind your net profits listed on the balance sheet come from your income statement. If your balance sheet doesn’t balance, review your income statement or create a new one by utilizing the income statement template found in our Media Gallery.
The balance sheet is given its name simply because it must balance. Investors, lenders, partners, and owners should be able to view a correct and accurate balance sheet quickly to determine if you owe more than your company is worth. On the other hand, if your balance sheet shows you have ample assets, cash and equity to cover your liabilities, that is a positive glance at your company.
To stay on top of your company’s snapshot, use the basic balance sheet example tips here along with the creation of a true income statement.
This post is part of the series: Understanding Balance Sheets
Learn tips and details related to understanding, creating and reconciling balance sheets. Also, find several examples and free templates you can download for your own personal or business use.