A balance sheet is a financial snapshot at a given time. It’s what a small business owns and owes. It highlights the assets, liabilities and equity of SMEs.
It’s another leg of the small business financial stool.
What are balance sheets in accounting?
A balance sheet highlights your financial situation and, at the same time, your financial health. These financial statements include both long-term and short-term assets, cash and cash equivalents, accounts receivable, etc.
Net assets are what’s left when you subtract liabilities. Liabilities and equity work within the framework of the balance sheet equation which is as follows: Assets = Liabilities + Equity
What is a balance sheet used for?
The balance sheet presents a clear picture of your financial situation. This is second in importance only after the income statement.
Main components of a balance sheet
The breakdown of this financial statement into several parts facilitates understanding. Here are the things that make balance sheets work.
These are also called resources. When you own an asset, you expect to derive future benefit from it. Therefore, things like accounts receivable are included. They generate cash flow, improve sales or reduce expenses and there are different categories.
- Current assets – Prepaid inventory and expenses. Things that will be cashed in a year.
- Fixed Assets – Like equipment and buildings. Long term resources.
There are also intangible assets like brands and financial assets like stocks and bonds.
A company’s liabilities are one of the key takeaways from the balance sheet. These allow a business to move forward. Long-term debt, such as interest payments, is included, and long-term liabilities cover things like mortgage payments.
Some small businesses are publicly traded. They sell stocks. It is what remains after the total debts have been paid.
Example of balance sheet
Reading one of these statements is one thing. Seeing an example helps to clarify what is printed. The one below is from Harvard Business School online.
The example above will help you highlight any questionable accounts so that you can arrive at a reasonable net worth.
Preferred shares can be added, and these shareholders have priority. In the end, using a template like this will provide a good idea to have it from the owners. Additionally, a pattern gives you a good base to check YoY trends and other metrics.
How to create a balance sheet
A balance sheet is one of the most important financial statements. Spreadsheets are a common format.
- Choose a reporting period – The balance sheets of public enterprises are generally quarterly. Also complete them to report on your financial health each year. A common date for a balance sheet here is December 31.
- List current assets – Liquid assets come first, such as cash, and company assets such as inventory are also added. Remember that long-term assets, debt securities and cash account go there too.
- Make a list of liabilities – Add sections for current liabilities and non-current liabilities. This part of your statement of financial position requires a total.
- Calculate equity – The owner’s equity must enter here along with the shareholders’ share as well. The total is shown on a balance sheet template.
- Add it all up – Sort the numbers for Liabilities, Equity, and Assets. Here is the form to complete this important financial statement. The sum of liabilities and equity should equal total assets.
A monthly balance sheet gives an accurate picture of items such as equity, current liabilities, and assets of a business. It combines with other financial statements to list financial obligations for any period.
Analyze a balance sheet
A company’s balance sheet provides figures on assets, liabilities and the level of financial risk you face. It gives business owners a good overview of their operations and some ideas on what needs to be changed.
Here are some tips for reading statistics.
Read the passive
It is an important part of the balance sheet. Don’t forget about short-term things like accounts payable and long-term things like borrowing money on a bank loan.
If your SME covers them, you must also add pension fund liabilities and payments made on other long-term investments. All debt securities must be taken into account.
Know the strengths
The total assets of the business are listed and the inventory that the business has is a current asset. How much cash and cash equivalents should be analyzed too. Balancing assets and liabilities means also looking at non-current assets, like patents. Depreciation works on these items to affect the net income at the end.
It may be retained earnings at the end of a financial year. Everything must be organized according to the actuality of the figures.
Financial strength ratios are the primary accounting technique and equation used. It is in fact a series of formulas resulting in the ratio of debt to equity. And others.
Another common tool is activity ratios. It shows how a small business operates its assets. Analysts often look at long term assets and average total assets. And how a company manages its short-term receivables. Debt to equity is another ratio with/or debt to assets and asset turnover.
Remember that the owner’s equity is invested at the end of the period.
What are the three main types of financial statements?
Information on the three types of financial statements is essential. It is a snapshot of the operating activities of an SME.
A Cash flow statement cash flow reports, what’s coming in and what’s going out. Cash flow statements have three sections, financing, investing and operating.
Wondering what an income statement is?
the income statement highlights income and expenses. Additional paid capital expenditures can be found here. This instruction is a driver of the other two types.
Finally, there is The balance sheet. The book value perspective is here, it’s basically what the business is worth.
If you are wondering what a profit and loss statement is, they are expense and income statements.
You can learn more from online experts like the Corporate Finance Institute.
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