- A balance sheet provides an overview of a business and its operations. It reveals the liabilities, assets and net equity value of a company.
- A balance sheet gives interested parties an idea of the financial condition of the business so that they can make informed financial decisions.
- The main purpose of a business is to make a profit. The balance sheet indicates whether the company is making a loss or a profit for the directors to determine the next steps to take. The balance sheet is a decision support tool.
A balance sheet offers a way to look inside your business and describe what it’s really worth. A balance sheet is different from a measure of profit and loss. It is a list of assets and liabilities. Every good balance sheet includes a few basics:
Going into detail can be daunting for many people who, when starting a business, may be doing it as a money-making hobby. It may be a mistake.
If you want to claim tax deductions, for example, it’s important to note how quickly and to what extent your assets depreciate (lose value as you age). Balance sheets also include labor costs, which is also important for calculating taxes. Keeping records of all of this is essential.
Also, if you ever want to sell the business, you need to be able to tell what the asset’s real value is – and that often has nothing to do with its potential, however good it may be.
The Small Business Administration has a sample balance sheet; it shows some basic things every beginner should have on it. But the state of assets and liabilities will differ, sometimes significantly, for different companies, and some of them fall under state or federal laws.
Bill Brigham, director of the New York State Small Business Development Center in Albany, New York, notes that a big mistake people make is trying to do it themselves even as their business fails. developed. Although business accounting software such as Quicken is fine, it’s a good idea to consult a professional accountant the first time you do a balance sheet.
“It will save you money down the road,” says Brigham.
The cost of hiring an accountant for a one-time job is a few hundred dollars; the cost of paying fines to the IRS or potentially losing money in tax breaks is often much higher.
Brigham also notes that a balance sheet is a good reality check. “Everyone thinks their business is worth more than it really is,” he said. If you are considering selling your business or incorporating it, the total value is vital information. If you’re applying for a small business loan, it helps to have something to show the bank that you’ve done your homework.
Drew Gerber started his own businesses and now runs a Georgian business that helps small businesses get to market. Gerber says a common pitfall for many entrepreneurs is trying to do everything themselves. Delegating the creation of the balance sheet to a professional (or an accountant friend) avoids this problem. In addition, a balance sheet tells you whether your business is actually profitable for your household or not. He notes that often business owners just guess at profitability, without really calculating the costs of owning many assets.
Real estate, for example, must appreciate faster than inflation and the interest cost of lending to generate a profit. If your business owns a property and this price appreciation does not occur, that asset is actually worth less.
A vehicle loses value every year, and this can be factored into a company’s total value because maintenance costs go up, not down, over time. But the depreciation is not so bad. This can lead to big tax deductions in some cases, but unless you know how much you can’t claim these reliefs.
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What to Include in a Balance Sheet
A balance sheet is divided into two parts: a company’s assets and liabilities and shareholders’ equity. Assets or means of operation balance with financial obligations, equity investments and retained earnings of companies.
There are two types of assets: current assets and non-current assets. Non-current assets refer to assets that cannot be liquidated within one year. These assets have a longer lifespan than current assets. They refer to tangible assets such as machinery, computers, the building in which your business operates, and land. Non-current assets can also be intangible assets such as patents, goodwill and copyrights. These assets are not physical in nature, but they can determine whether a market succeeds or not.
These are the financial obligations that a business owes to other entities. They are classified into two categories, current liabilities and long-term liabilities. Long-term liabilities refer to long-term debts and financial obligations other than debt maturing after a period of more than one year.
Current liabilities must be paid within one year. They include short-term borrowings, such as accounts payable or monthly interest payable on loans.
Shareholders’ equity is the initial amount of money invested in a company. When retained earnings are transferred from the income statement to the balance sheet, they constitute the net worth of the business.
[Related Read: Best Accounting Software for Small Business]
How to create a balance sheet
Use the following accounting equation to make a balance sheet:
Assets = Liabilities + Equity
Make sure that the value of total assets equals the total of liabilities and owners’ equity. The asset account should contain all the property and resources that a business owns, while the equity represents all the contributions of the owners of the business and the past profits. Most business assets are financed by debt.
Choose the balance sheet date.
It is essential for an organization to determine the end date of the financial year. This is different for most companies with most financial years ending between March and June. Collect enough data over the year to ensure you have the right representation of the company’s position. The date must always be indicated on the balance sheet.
Have a header for the balance sheet.
Always have the stock’s balance sheet at the top of your balance sheet.
Prepare the assets section.
Assets may include, but are not limited to, accounts receivable, inventory, and prepaid expenses. List current and non-current assets.
Include the liabilities and owners’ equity section.
Liabilities should be classified as long-term liabilities and current liabilities. Examples of liabilities include pension plan obligations, interest on borrowings, and obligations payable, among others.
Balance assets against liabilities and equity. These should match.