Balance sheets and understanding your small business’ equity
With many small businesses not making it past the five- or 10-year mark, what can you do to thrive past those major milestones? One opportunity to understand important small business financial insights is to create a balance sheet.
Here, we’ll summarize the balance sheet definition, what goes into a balance sheet, and how to create a balance sheet. Plus, we’ll show you a balance sheet example that we’ve created for our bookkeeping clients.
Read on for insight into this important financial document!
What is a balance sheet?
The definition of a balance sheet is important to understand as a business owner, so first we’ll answer the question of “what is a balance sheet?”
A balance sheet is an important document that takes a snapshot of your business’ financial vitality by showing your business’s assets, liabilities, and equity on a specified day. It provides a 10,000-foot view of what your business (and shareholders) owns and owes.
Similar to an income statement (also known as a P&L statement), it details the balance of your business’ income and expenses so you can make informed business decisions like:
- Where to get money to pay for things (like a loan or equity)
- Understanding your business’ liabilities
- How to compare the financial position of your business from month-to-month or year-to-year; and use the insights to identify opportunities
The major difference between this financial document, and others, is the fact that it displays net equity or retained earnings. In fact, it’s the best financial document to create to get an overview of the company’s net worth at a single point in time. (By contrast, an income statement reports transactions over a specific period of time.)
Balance sheet accounts
You might find a corresponding term when searching for the balance sheet definition: balance sheet accounts. Balance sheet accounts refer to accounts that flow to the balance sheet as opposed to those that flow to the income statement when financial statements are compiled from the accounting records.
Who needs a balance sheet?
Any business can get value from using a balance sheet. But, if you’re looking for small business financing or to sell your business, this document is especially important. This is because the document helps identify your business’ worth.
Additionally, many business entity structures require you to create a balance sheet annually to report the business’ financial position to stakeholders, state treasurers, and even the IRS (in some cases).
How do you create a balance sheet?
You can calculate a balance sheet using three key inputs:
- Assets: These are financial holdings a business has. They are usually categorized into current vs. long-term.
- Liabilities: These are financial debts a business has. They are usually categorized by current vs. long-term.
- Equity: This is the remaining balance of assets and liabilities.
These inputs are put into an equation: Assets = Liabilities + Equity.
Assets are on one side, liabilities and equity are on the other. The three inputs are equated to arrive at a total.
What goes on a balance sheet?
The next question we’ll tackle the answer to is “what goes on a balance sheet?” Here are the general elements of a balance sheet:
DATE PREPARED AND DATES ASSESSED
|Current Assets: + Money in Bank + Petty Cash + Inventory + Accounts Receivable + Prepaid Insurance + Short-Term Investments||Current Liabilities: + Accounts Payable + Customer Deposits + Wages Payable + Accrued Rent or Lease Amount + Accrued Business Utilities + Accrued Federal Tax + Pension Payable + Business Dues Payable + Medical Dues Payable + Sales Tax Payable (if applicable)|
|Total Current Assets||Total Current Liabilities|
|Fixed Assets + Land Value + Real Property + Less Depreciation + Long-Term Investments||Long-term Liabilities: + Business Loans + Mortgage on Business-Owned Property|
|Total Fixed Assets||Total Long-term Liabilities|
|Plant, Property, and Equipment + Equipment Value + Less depreciation||Owner’s Equity: + Stock or investment + Retained Earnings + Less: Member Draws|
|Total Fixed, and Plant, Property, and Equipment Assets||Total Owners Equity|
|TOTAL ASSETS||TOTAL LIABILITIES AND OWNERS EQUITY|
If all of this sounds too complex, let Block Advisors help. We’re a team of experienced tax, bookkeeping, and payroll professionals. Helping small business like yours is our business. Learn more about Block Advisors.
Need a balance sheet example? Look no further…
We mentioned the general components of a balance sheet above. But it helps to see how it’s applied. Here’s a balance sheet example created by Block Advisors as part of our bookkeeping services.
Get help with creating a balance sheet and other small business tasks
We get that small business owners may not have the time or expertise to crunch numbers. Here’s where Block Advisors can help lighten your load. We offer tax, bookkeeping, and payroll services to help you get back to what you love.