One of the most important financial documents of any business is the balance sheet. The balance sheet gives you a detailed picture of your company's financial position at a given point in time and can help you make wise financial decisions. Most of the accounting software we reviewed has a tool for managing your balance sheet.
The balance sheet is necessary for a number of reasons. Not only does it give you an immediate report on the current financial status of your company, it allows you to analyze trends to see where improvements can be made. The balance sheet gives critical information to potential lenders, helping them to decide on a line of credit for your business.
What is the balance sheet? The balance sheet is simply a list of all of your company's equity, including assets and liabilities. An asset is anything that your company owns. There are two main types of assets. The type of asset is dependent upon the amount of time it takes to liquidate the assets into cash. Current assets can be liquidated very quickly. These assets include cash, money accounts, and account receivables. Fixed assets, on the other hand, are harder to liquidate and take more time. These include land, buildings, equipment, etc. With the exception of land, most fixed assets depreciate in value. This depreciation must be figured into the total value of fixed assets. Any type of asset that does not fit into these two groups is placed in the "other" category. These assets include prepaid expenses that have value, but cannot be exchanged for cash.
Liabilities are anything that is owed by your company to someone outside of the company. There are two main types of liabilities. Current liabilities are liabilities that are due in a year or less. These include accounts payable and payroll. Long-term liabilities will take more than a year to pay off. These typically include leases and loans.
Equity is the difference between the assets and the liabilities. The equity includes your initial investment, which is usually the stockholders' money, as well as any money that is retained through business operations and is put back into your business. If the assets outweigh the liabilities, the equity will be positive and your business will be healthy. If the opposite is true, your business is losing money and adjustments need to be made.
The balance sheet is a necessary tool for your small business. It is proof of your financial status and can be consulted to help you make wise financial decisions that will aid in the growth of your small business.
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King, Julie. CanadaOne.com: Accounting 101: Balance Sheet Basics. Canada One Magazine. (2004).(2003).
VA-Interactive.com: Preparing a Balance Sheet. (2004).