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?
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
un-collectable? 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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