A balance sheet is a snapshot of your company’s finances and is the CliffsNotes version of your financial statements. It sums up your business’s assets, liabilities and owner’s equity at a given point in time.
Assets include everything your business owns with a dollar value, like cash and items that will turn into cash within one year or less, such as inventory. Fixed assets are less liquid, such as property and equipment, and depreciate over time.
Assets
The assets in the balance sheet are all resources your practice owns that hold value. They’re listed from most liquid to least (current assets, like cash and accounts receivable), followed by fixed assets, like land, buildings, heavy equipment and vehicles. Intangible assets, such as trademarks and patents, are also typically included in the asset section.
The liabilities in the balance sheet reflect all of the money your practice owes to others. They’re tabulated based on their due date, with short-term loans and amounts payable recorded first, then accrued expenses, such as wages and taxes. The bottom half of the balance sheet reports your total shareholder’s equity, which includes common stock, retained earnings and accumulated other comprehensive income. When all is said and done, the total of all your liabilities and owners’ equity should match the total of all of your assets.
If it doesn’t, there are likely mistakes in your accounting that need fixing. The best way to get a handle on this is to compare your balance sheets from the same time period.
Liabilities
The liabilities section of the balance sheet details what a company owes to outside parties. Depending on the business, this might include short-term financial obligations such as accounts payable and payroll taxes (the current portion of long-term debt), marketable securities, prepaid expenses, and money owed to the company from payers who’ve already paid invoices or credit cards. Other long-term liabilities might include mortgage payments, pension plans, and interest on corporate bonds issued by the company.
The final section of the balance sheet, titled Shareholders’ Equity, reports a company’s common stock value and retained earnings. These represent the investment capital of shareholders. The total of the three sections reconciles to a company’s assets and debts, as shown on the left side of the balance sheet. Because the balance sheet is a snapshot of one point in time, it doesn’t reveal trends over time, which are revealed by the cash flow statement and income statement. However, it’s still a useful tool to understand the health of a company.
Shareholders’ Equity
The shareholders’ equity section of the balance sheet represents the residual value of a company that is left after subtracting all liabilities from all assets. It is also known as net worth or the owner’s equity. This metric is used to gauge the health of a business and is the foundation for many financial ratios.
The two main components of shareholders’ equity are common stock and retained earnings. The former represents the initial investment made by shareholders/owners in exchange for shares of the company. The latter represents cumulative net income that a business has kept instead of distributing as dividends to shareholders.
The other line items in the shareholders’ equity section of a balance sheet include long-term liabilities (leases, bonds payable) and other comprehensive income (OCI). OCI includes non-operating gains/losses and foreign currency translation adjustments. These can be negative or positive. If they are negative, the company may be at risk of insolvency if they continue to trend down.
Summary
The balance sheet provides a snapshot of a business’s finances. It follows the fundamental accounting equation: Assets should equal liabilities plus shareholders’ equity. If they don’t, a company is experiencing problems.
Assets include anything that can be converted into income for the business, such as inventory or accounts receivable. They can be current or long-term assets, depending on whether they’re expected to turn into cash within a year (current) or require more than a year to be retrieved or used again (long-term).
Liabilities are amounts that the company owes to outside parties. They can also be classified as current or long-term, based on when they need to be paid off (accounts payable) or how much they will cost to pay back in future years (loans and debt payments). Shareholders’ equity includes the money invested by owners/shareholders of the company and any retained earnings. It is calculated using the simple formula: Total assets minus total liabilities.Bilanz
