Breaking Down A Basic Balance Sheet

Posted by: Brookside Admin

A balance sheet is a vital financial statement for business owners. Without one, it's much more difficult to accurately gauge the health of your business, your cash flow, and your income. Your balance sheet includes three sections. Here's a breakdown of what's included: 

Assets

These are the things currently owned by your company. That might include cash, your inventory, vehicles, equipment, buildings, and accounts receivable. Then, there's the distinction between current assets, which can be converted into cash this year, and fixed assets, which are typically bigger expenses will remain with your business for at least the next year. Current assets include cash in the bank, accounts receivable, and your inventory. Not only should cash on hand and in the bank be counted regularly, but you should also be forecasting the amount of cash you're likely to have next week, or next month to stay ahead of bill payments, employee salaries, and your own pay. Accounts receivable allows you to track what customers haven't paid for the products or services you've already provided. Failure to adequately track these delinquent accounts results in the loss of revenue. Finally, inventory will be tracked differently in different industries. Find a system that works for you, and use it to help you meet your estimated sales. Fixed assets, like vehicles, equipment and buildings, need to be accurately tracked for insurance and tax purposes. 

Liabilities

These are items you owe. That includes current liabilities that will need to be paid this year, and could also include longer term items like loans where payment isn't due in the next 12 months. Accounts payable is used to stay on top of payments you owe to vendors who give you credit. This would include purchases made with your credit card, which will need to be paid off. You'll also track a number of different taxes. If you sell goods, sales tax needs to be collected from your customers and closely tracked. Likewise, payroll tax for each of your employees needs to be closely monitored. Depending on your business, you may also have property taxes, and other state and federal obiligations to note. Finally, loans will count in your current liabilities if you owe payments in the next 12 months. 

Net Worth

Your net worth is simply your current assets minus your current liabilities. It's important to keep this at an acceptable level since it determines the health of your business and may be a stipulation of any loans you've taken out. You can also use a current ratio, which takes your current assets and divides them by current liabilities. As long as this ratio stays above 1, you should be able to pay your bills and stay in business. 

For help with accounting for your business, valuations, and other services, contact us at Brown Kinion & Company CPAs.