What is a Balance Sheet?
A balance sheet is a document that accurately shows what position your business is in on a given date. For example, if you wanted to create a balance sheet for the month of June, your balance sheet would show your business’s financial position for that month. While you could complete a balance sheet on a monthly basis, companies generally only complete their balance sheets at the end of a financial period.
A balance sheet will show you what assets your business has and what your business owes at the point in time you complete the balance sheet. You will be able to tell whether your business is in a strong, okay, or weak position from this sheet. While a balance sheet cannot tell you everything about your company’s financial position, it does help to give you a picture.
The Format for Your Balance Sheet
Your balance sheet will contain three categories of information:
- Assets – This is the monetary value of anything your business owns that has value. For example, your business property, any stock, and any cash accounts would go into this category.
- Liabilities – Liabilities are any debts that you owe for your business. A business mortgage, credit card, and business loan all would fall under this category.
- Net Worth – The net worth of your business (and the figure you are interested in obtaining) is equal to the sum total of your assets minus the sum total of your liabilities.
If you own more than you owe (your goal) then you will have a positive net worth. However, if you owe more than you own (as is common in many start-up businesses) you will have a negative net worth. When a company has a positive net worth it is said that they are operating "in the black." When a company has a negative net worth, however, they are said to be operating "in the red."
Where to Find the Information for Your Balance Sheet
Ideally, you will be keeping meticulous accounting records. If you use accounting software, often times your software will have an automatic feature that will generate the information you need from your already entered information. If you do not use accounting software, but instead use Excel for accounting or do your accounting the old fashioned way with log books, you will need to first make sure your records are complete, correct, and updated, and then use the information from these records to plug into your balance sheet.
Your business assets may include the following items:
- Cash – What you have on hand and immediately accessible, even if you have not yet made that deposit.
- Petty Cash – Many companies keep cash on hand for small expenses. If your company does so, include this amount on your balance sheet.
- Accounts Receivable – If you have outstanding invoices that has yet been receieved at the time that you create your balance sheet, it goes int his category. You should always track the money owed to you by your clients and customers.
- Inventory – If you deal with products rather than services, you will want to track the cash-value not only of your completed products, but also of the materials that go into making those products and any products (or projects for service-oriented people) used for your business.
- Short-Term Investments – This includes any CDs, stocks or bonds your company intends to turn into cash within the time period of one year.
- Prepaid Expenses
- Long-Term Investments – Any CDs, stocks, bonds, etc. that you intend to hold for more than one year.
- Fixed Assets – this includes land (at the original purchase price), buildings (take into account any possible depreciation), equipment, furniture, business vehicles, etc. (take into account depreciation).
Once you have your assets accounted for in the right column of your balance sheet, you will take account of your liabilities in the left column of your balance sheet. Items included under liabilities may include:
- Accounts payable – Within one cycle of operation – your accounts payable will include any debts that your company owes for any goods or services purchased. Ideally, you will not be behind on any of these items.
- Notes payable – Any short-term loans or debts that you owe. List the principal (the amount borrowed) and not the interest.
- Interest Payable – Here is where you will list that interest that you owe on any credit cards or loans.
- Taxes payable – This is an estimated amount.of what you will owe based off of what you have earned in that period. If you are self-employed, don’t forget self-employment tax. If you have employees, do not forget to account for any taxes that will be withheld from employee paychecks.
- Payroll Accrual – What is currently owed to your employees for their salaries and wages?
- Long-Term Liabilities – Included in this category are things like a mortgage for your businessplace or a car loan for a company vehicle. The amount you will jot down here will be equal to the balance outstanding minus what is due currently.
The Net Worth
Here is the really important information on your balance sheet. Net worth is sometimes referred to as "capital" or "owner equity" depending upon the business. Net worth is equal to the assets – the liabilities. Now, look at what sort of business structure your company has. If you have a sole proprietership, then there will be one line with the net worth listed on it. If you are a partnership, then there will be a line for each partner along with his or her share of the net worth. If the business is structured as a corporation, then you will list the sum of all contributions by owners and stockholders as well as any earnings that are leftover.