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ACCOUNTING

The Basics of Balance Sheets

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A balance sheet is a snapshot of a business's financial condition at a specific moment in time, usually at the close of an accounting period. A balance sheet comprises assets, liabilities, and owners' or stockholders' equity. Assets and liabilities are divided into short- and long-term obligations including cash accounts such as checking, money market, or government securities. At any given time, assets must equal liabilities plus 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 get a handle on the financial strength and capabilities of the business. Is the business in a position to expand? Can the business easily handle the normal financial ebbs and flows of revenues and expenses? Or should the business take immediate steps to bolster cash reserves?

Balance sheets can identify and analyze trends, particularly in the area of receivables and payables. Is the receivables cycle lengthening? Can receivables be collected more aggressively? Is some debt uncollectable? 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.

  1. 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. Long-term assets, such as real estate or machinery, are less likely to sell overnight or have the capability of being quickly converted into a current asset such as cash.

  2. Current assets: Current assets are any assets that can be easily converted into cash within one calendar year. Examples of current assets would be checking or money market accounts, accounts receivable, and notes receivable that are due within one year's time.

    Cash
    Money available immediately, such as in checking accounts, is the most liquid of all short-term assets.

    Accounts receivables
    This is money owed to the business for purchases made by customers, suppliers, and other vendors.

    Notes receivables
    Notes receivables that are due within one year are current assets. Notes that cannot be collected on within one year should be considered long-term assets.

  3. Fixed assets: Fixed assets include land, buildings, machinery, and vehicles that are used in connection with the business.

    Land
    Land is considered a fixed asset but, unlike other fixed assets, is not depreciated, because land is considered an asset that never wears out.

    Buildings
    Buildings are categorized as fixed assets and are depreciated over time.

    Office equipment
    This includes office equipment such as copiers, fax machines, printers, and computers used in your business.

    Machinery
    This figure represents machines and equipment used in your plant to produce your product. Examples of machinery might include lathes, conveyor belts, or a printing press.

    Vehicles
    This would include any vehicles used in your business

    Total fixed assets
    This is the total dollar value of all fixed assets in your business, less any accumulated depreciation.
  4. Total assets: This figure represents the total dollar value of both the short-term and long-term assets of your business.

  5. Liabilities and owners' equity: This includes all debts and obligations owed by the business to outside creditors, vendors, 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."

    Accounts payable
    This includes all short-term obligations owed by your business to creditors, suppliers, and other vendors. Accounts payable can include supplies and materials acquired on credit.

    Notes payable
    This represents money owed on a short-term collection cycle of one year or less. It may include bank notes, mortgage obligations, or vehicle payments.

    Accrued payroll and withholding
    This includes any earned wages or withholdings that are owed to or for employees but have not yet been paid.

    Total current liabilities
    This is the sum total of all current liabilities owed to creditors that must be paid within a one-year time frame.

    Long-term liabilities
    These are any debts or obligations owed by the business that are due more than one year out from the current date.

    Mortgage note payable
    This is the balance of a mortgage that extends out beyond the current year. For example, you may have paid off three years of a 15-year mortgage note, of which the remaining 11 years, not counting the current year, are considered long-term.

    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.

    Common stock
    This is stock issued as part of the initial or later-stage investment in the business.

    Retained earnings
    These are earnings reinvested in the business after the deduction of any distributions to shareholders, such as dividend payments.

  6. Total liabilities and owners' equity: This comprises all debts and monies that are owed to outside creditors, vendors, or banks and the remaining monies that are owed to shareholders, including retained earnings reinvested in the business.

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Last updated: May 12, 2000




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