Have you checked your balances lately?
The Balance Sheet is an important report in your company’s financial statements. Unfortunately, I find that many small businesses never look at this report. Usually it is because they do not understand the report or think it has nothing to show them in terms of profitability.
However, this is an important report for several reasons.
* If you are the owner, these are your numbers. If you don’t understand them, you want to, so ask someone.
* This report often shows me some mistakes people are making in QuickBooks.
* This report shows the overall health of your business and can alert you to issues that may not be apparent in your profit and loss. Wouldn’t you like to know?
* Lenders may carefully review this report to determine whether or not they will lend you and / or how much they will lend. Therefore, it is beneficial for you to understand what they will see and use to determine your loan.
A summary of balances
A balance sheet is like a snapshot: it represents a date in time, for example 12/31/2014. Numbers represent balances, and since balances change daily, a balance sheet only represents a point in time versus a range. There are three parts to your balance sheet: what you own (assets), what you owe (liabilities), and your equity (equity).
Assets
You will most likely find three main types of assets
1. Current (generally means 1 year or less)
* Most balances start with cash balances, and these generally represent what you have in the bank minus any uncashed checks that could reduce your account once they come in.
* If you invoice customers, but have not been paid, that is considered an asset because it is owed to you; This is commonly known as Accounts Receivable.
* Employee advances or other loans payable to your business are also frequently listed here.
* If you store and sell products, the cost of the products you have not yet sold would be in your Inventory Assets account.
2. Fixed – If you have equipment, furniture, cars or trucks or something similar that lasts for years, you will have a balance in Fixed Assets. If it’s been a while since you bought them, you probably have accumulated depreciation (the total that you have depreciated over the years). When you subtract your accumulated depreciation from its original cost, you get a net value for your Fixed Asset.
3. Others: here you can find security deposits, prepaid insurance, etc.
You will also have a total for all your Assets
II. passive
Liabilities, the second of the three main sections of a balance sheet, are money you owe to others, such as taxes, suppliers, or employees.
1. Current (expires in one year or less). Here you see
* Accounts Payable – Daily money owed to vendors, independent contractors, phone bill, etc.
* Credit Cards – If you set up credit cards as an account in QuickBooks, they are listed here
* Line of credit (if owed)
* Payroll taxes you owe
* Sales tax
* “Short-term” loans (maturing in less than a year)
2. Long-term (more than a year)
If you have bank loans, they usually each have a separate account, just like a bank account does. Each bank loan account represents the principal owed on a loan (the interest you pay goes toward an expense on your profit and loss report).
III. Capital
The last section of the balance sheet is equity. It is the section that will vary the most depending on the type of entity in which your company is configured.
* For example, if your business is a corporation, there will be a common stock account that will represent the original amount of money you put into the business; it will match the articles of incorporation you wrote when you joined. This amount will rarely change during the life of the business.
* If your business is set up as a partnership, the equity section will include an account for each partner that represents their balance in the business, which is the net amount of money they have invested in the business over the years or so the business. income or losses over the years
* There is often an account called Paid Capital, which is the amount of additional money that you have put in or withdrawn from the company beyond the balance of ordinary shares.
* You will also have a retained earnings account. This reflects the profit (or loss) accumulated over the years of operation.
* The net income figure is the bottom line of your profit and loss.
Balanced balance sheet
If you take a closer look at the balance, here’s another concept. If you take your total assets (what you own) and subtract your total liabilities (what you owe), you keep your equity (or equity, as I sometimes say). The way it appears on the balance sheet is that your assets equal your liabilities plus equity, ALWAYS.
So take a look at your balance sheet and see what observations you see about your business.