The Mysterious Balance Sheet
What is a Balance Sheet?
Balance Sheets can mystify business owners. It’s sometimes helpful to simplify the balance sheet if you think of it in terms of buying a house where the assets are the house, liabilities the mortgage and equity what the house is worth.
Informed by a company’s list of accounts – its chart of accounts, the balance sheet is one of the most important business reports a company can use. The balance sheet is a ‘snapshot’ of what a business owns (assets) and what it owes (liabilities) on any given day. Ultimately depicting a company’s worth (equity).
“It calculates how much your business is worth (your business’s equity) by subtracting all the money your company owes (liabilities) from everything it owns (assets): Assets – Liability = Equity” Intuit Community
Why does Checking Account get listed first?
What the business owns – assets, get listed first on a balance sheet. Asset accounts are presented in terms of ‘ease of accessibility’ to funds. Since it’s easy to take out money from a checking account, it gets listed first. Followed by savings, petty cash then money owed to the business – accounts receivables (A/R) . A/R funds are owned by the company just not in-hand and usually become available within 15 – 30 days as determined by payment terms.
Liabilities are listed in order of ‘obligation to others’ by current and non-current liability. Current are payable amounts required to be settled within 12 months and non-current liabilities will take longer than 12 months to settle.
Equity will be the remaining worth of a business; important to know and understand in many circumstances particularly in times of growth.
A Balance Sheet, combined with the Profit and Loss (aka Income Statement) along with a Cash Flow Statement, business owners, operators and financial lenders can easily determine a company’s health and wealth. Critical when qualifying for a line of credit or business loan to fund growth, equipment purchases and overall company sustainability.
Chris McGee regularly meets with business owners to help them clean up their financial accounts, prepare accurate business reports and streamline their accounting software and processes to better inform their forecasts and business decisions.
Call Chris directly for a free consultation at (360) 303-5798.
ProFound Impact is the consulting division of Bellingham, Wa based Business Support Services Northwest, LLC. Serving Whatcom, Skagit, Island and Snohomish Counties for over 25 years.