Balance Sheet

Small business start up information

A balance sheet captures a snapshot of a businesses financial position at a specific time, usually at the close of a financial period.  The balance sheet shows all the resources controlled by the enterprise and all the obligations due by the enterprise.  A balance sheet is made up of the businesses assets, liabilities, and owners equity.  Assets and liabilities are sub-divided into current and non current, these are the short (less than 12 months) and long-term (greater than 12 months) obligations of the business.

In accounting terms the balance sheet is represented by the following relationship:
Assets = Liabilities + Owners Equity.
  • An asset is anything the business owns that has monetary value.
  • Liabilities are the claims of creditors against the assets of the business.

What is a balance sheet used for?

A balance sheet helps a small business owner quickly see the financial strengths and capabilities of the business.

It will show the liabilities of a business and indicate the relative liquidity of the assets of the business.

A balance sheet with comparative years can be used to identify and analyse trends, particularly in the area of receivables and payables. Is the receivables cycle lengthening? Can receivables be collected more aggressively? Is some debt uncollectible? Has the business been slowing down payables to forestall an inevitable cash shortage?

Balance sheets, along with income statements, are the most basic elements in providing financial reporting to potential lenders such as banks, investors, and vendors who are considering how much credit to grant the firm.

Components of a Balance Sheet

  • Assets
Assets are subdivided into current and long-term assets to reflect the ease of liquidating each asset. Cash, for obvious reasons, is considered the most liquid of all assets.

Current assets
Current assets are any assets that can be easily be consumed or converted into cash within 12 months. Examples of current assets would be cash, accounts receivable, and stock.

Non-Current Assets
Non Current Assets are those assets less likely to be converted into cash or consumed within 12 months such as plant and machinery, equipment or motor vehicles.
  • Liabilities and owners’ equity
This includes all debts and obligations owed by the business to outside creditors, suppliers or banks that are payable within one year, plus the owners’ equity. Often, this side of the balance sheet is simply referred to as “Liabilities.”

Current Liabilities
Current liabilities are those liabilities that would in the ordinary course of business be due and payable within 12 months.  These can include, credit card debts and accounts payable.

Non-Current Liabilities
These are any debts or obligations owed by the business that are due more than one year out from the current date.

Owners’ Equity
Sometimes this is referred to as stockholders’ equity. Owners’ equity is made up of the initial investment in the business as well as any retained earnings that are reinvested in the business.  It is the residual interest in the assets of the entity after the deduction of its liabilities.
 

Feel free to download our Balance Sheet Template click here .

 

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