Financial Statements - Balance Sheet

August 29, 2023

There are 5 posts in this series:

A Balance Sheet is similar to a Personal Financial Statement, but applies to your business. Balance Sheet reports are typically produced by accounting software, but can also be assembled manually - often using spreadsheet software.

A Balance Sheet shows a snapshot of your business’ financial situation at one or more points in time. Tomorrow’s balance sheet is likely to be slightly different than today’s. A balance sheet for a small retail business might look like:

Balance Sheets have two main sections:

Assets: things the company owns that have financial value. These are always recorded at cost, unlike a Personal Financial Statement where they are recorded at current market value.
Liabilities & Owner’s Equity: amounts the company owes

Many Balance Sheets will show values in each account for several dates to allow you to analyze changes. A dollar change and/or percentage change column can often be included at the right to make this process easier.

Assets are always presented first, either at the top of the report or in the column on the left of the report. Liabilities & Owner’s Equity are presented next, either below Assets or in the column on the right of the report.

A typical simple Balance Sheet is shown on the previous page. Common sections and accounts you may see for small businesses are briefly described below.

The Assets section starts with Current Assets. The word “Current” means items that are relevant within the next 12 months. For Assets, this generally means assets that are cash, can be turned into cash within 12 months, or which will be used over the next 12 months (i.e. prepaid insurance). The Current Assets section will include items such as

Petty Cash - cash you have on hand to conduct business
Bank Accounts - checking or savings account balances
Accounts Receivable - amounts you are owed, typically by customers
Inventory items - either raw materials or finished goods
Pre-paid expenses - multi-month copier contracts, insurance premiums, etc.

Non-Current Assets are assets with a useful life of greater than one year, and include the long term portion of Current Assets. Examples include:

Intangibles such as patents, trademarks, licenses, etc.
Receivables due in 12 months or longer (i.e trade, lease, etc.)
Long term contracts with customers

Fixed Assets are a type of Non-Current Asset, but can also be listed by themselves if there are no other Non-Current Asset accounts. Fixed Assets are listed on a Balance Sheet at cost (not current market value). Fixed Asset accounts often include:

Land - owned by the company
Buildings - owned by the company
Equipment - with an expected useful life of a year or more

Depreciation attempts to show how much of a Fixed Asset’s useful value has been used up since it was acquired. Land does not depreciate. Buildings, furniture, and equipment do. Depreciation reduces the total value of Fixed Assets, and is usually recorded monthly - though the timing may differ in smaller organizations. Depreciation amounts can be calculated in several ways, and your accountant will typically recommend the approach that seems most appropriate for your business and/or Fixed Asset category. The simplest method assumes that an asset’s value will decline by the same amount every year. Ideally, an asset’s depreciated value (cost less accumulated depreciation) would be close to what that asset could be sold for today - but this is seldom true for a number of possible reasons, including fluctuations in the market value.

Total Assets are the sum of Current Assets, Non-Current Assets, and/or Fixed Assets.

Liabilities start with Current Liabilities: items that must be paid for within the next 12 months. These typically include:

Accounts Payable - amounts due to vendors or others that have not been paid yet
Accrued Payables - amounts you will owe, such as Payroll for time worked before payday
Short Term Debts - such as Line of Credit balances
Current Portion of Leases - amounts due within 12 months
Current Portion of Long Term Debt - interest and principal payments due within 12 months

Next come Long Term Liabilities: items that must be paid more 12 months into the future, which typically can include:

Bank Loans which will not be paid off for a year or more
Leases which extend for more than the next 12 months
Notes - typically payable to private lenders

Total Liabilities are the sum of Current and Long Term Liabilities.

The final section is often titled Owner’s Equity, which is defined to be the difference between Assets and Liabilities. It typically includes accounts such as:

Capital - Funds invested by owner or earned by company, reduced by operating losses or cash taken out by the owner.
Owner’s Draw - Total cash taken out by the owner during this fiscal year, which will reduce Capital. Typically used to reduce Capital at year end, then set to zero.

Note that Owner’s Equity may or may not reflect the current value of the company. Assessing the value of a company can be complex, and is usually done in several ways to ensure that its true value is being reflected.

And finally, you will see a Total Liabilities and Owner’s Equity. If the rules of accounting have been followed, this amount will always equal Total Assets. This is why this report is called a Balance Sheet - if the two numbers do not “balance”, one or more mistakes have been made in the accounting.

Analyzing a Balance Sheet often involves comparing account balances from the earlier and later periods to understand all changes. Understanding why any changes occurred is important when managing a business. The following resources introduce some common approaches to analyzing balance sheets:

To ask questions and/or learn more about financial statements, register for a “Financial Statements” workshop in the SCORE workshop calendar or request to meet with a SCORE Mentor (a free service).

SHARE THIS ARTICLE

Original text