The Balance Sheet is an important report in your business’s financial statements. Unfortunately, I find that many small businesses never look at this report. Usually it’s either because they don’t understand the report or they think it has nothing to show them in terms of profitability.
However, this is an important report for several reasons.
- If you’re the owner, these are your numbers. If you don’t understand them, you want to, so it’s to your benefit to 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 warn you of problems that may not be apparent in your P & L. Wouldn’t you like to know?!
- Lending institutions may take a hard look at this report when determining whether or not they will lend to you and /or how much they will lend. So it’s beneficial for you to understand what they will be seeing and using to determine your loan.
A Summary of Balances
A balance sheet is like a snapshot – it represents one date in time, for example, 7/31/18. The numbers represent balances, and since the balances change daily, a balance sheet only represents one point in time versus a range (as found in your Profit & Loss report). There are three parts to your balance sheet
- What you own (Assets),
- What you owe (Liabilities) and
- Your net worth (Equity)
You will most likely find three major types of assets
-Current (usually means 1 year or less)
- Most balance sheets start off with cash balances, and these typically represent what you have in the bank minux 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’s owed to you; this is typically known as your Accounts Receivable.
- Employee advances or other loans payable to your business are also frequently listed here.
- If you stock and sell products, the cost of those products you haven’t sold yet would be in your Inventory Asset account
-Fixed – If you own 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’ve purchased them, you probably have an Accumulated Depreciation (the total you’ve depreciated over the years). When you subtract your accumulated depreciation from your original cost, you get a net value for your Fixed Asset
-Other– Here you may find security deposits, prepaid insurance, etc.
You will also have a total for all your Assets
Liabilities, the second of three major sections of a balance sheet, are monies you owe others, such as taxes, vendors, or employees:
–Current (due in one year or less). Here you see
- Accounts Payable- Day to day money you owe to suppliers, 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 you owe)
- Payroll taxes you owe
- Sales tax
- “Short-term” loans (due in less than a year)
–Long-term (more than 1 year)
If you have bank loans, they usually each have a separate account like a bank account does. Each bank loan account represents the principal due on a loan (the interest you pay goes to an expense on your Profit & Loss report).
The final section of the balance sheet is Equity. It is the section that will vary the most depending on the type of entity your business is set up as.
- For example, if your business is a corporation, then there will be a common stock account which will represent the original amount of money you put into the business; it will match the Articles of Incorporation that you drew up when you incorporated. This amount will rarely ever change for 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 firm, which is the net amount of money they have put into the business over the years plus or minus the business income or loss through the years
- There is often an account called Paid-in Capital which is how much additional money you’ve put in or taken out of the company beyond the common stock balance.
- You will also have a Retained Earnings account. This reflects accumulated profit (or loss) through the years of operation.
- The Net Income figure is the bottom line from your Profit and Loss.
Balanced Balance Sheet
If you take a closer look at the balance sheet, here’s another concept. If you take your total assets (what you owN) and subtract your total liabilities (what you owE), you are left with your Equity (or net worth as I sometimes say). The way it’s presented on the balance sheet is your assets equal your liabilities plus equity – ALWAYS.
If you run this report, and it’s not balanced, then check the following:
- Did you run this report on a cash or accrual basis? A cash-basis balance sheet may not always be balanced, but this article walks you through the steps to correct that.
- If this is an accrual-based balance sheet, then there may be issues with your data file and you’ll want to reach out to tech support.
So take a look at your balance sheet and see what observations you notice about your business.