|Small Business Finance and Accounting|
Being that finance is one of the most important functions of every business, and the balance sheet is an absolute standard of company finance, I have created this resource to explain the details of a small business balance sheet.
Small Business Balance Sheet
To recap, the balance sheet focuses on three key financial figures; "Assets", "Liabilities", and "Equity".
Assets are simply anything of value that is owned by the company. Whether it is a vehicle, building, cash in the bank, or 2 years worth of prepaid office cleaning services the value of everything the company owns is accounted for in what is called "Total Assets".
The total assets figure is broken up into three types of assets. These are "Current Assets", "Fixed Assets", and the odd cousin "Intangible Assets". These three different types of assets are explained below.
Current assets are anything of value that can easily be turned into cash in less than a year. Assets meeting this criterion are considered current assets.
List of Typical Current Assets on Balance Sheet
- Cash and Equivalents
- Investments (Stocks, Bonds, etc.)
- Accounts Receivables
- Unsold Inventory
- Prepaid Services or Bills
Just remember to think cash and highly liquidatable assets when considering the current assets section of the balance sheet.
Fixed assets as you might imagine are those things of value that are harder, more complicated, and take considerably longer in most circumstances to liquidate.
List of Typical Fixed Assets on Balance Sheet
- Real Estate
- Accumulated Depreciation (This is reflected as a negative (-100) figure to account for the change in value of aging fixed assets)
It is important to mention that the value of the fixed assets are considered with respect to the IRS tax amortization or depreciation schedule which may result in fixed assets having values that do not reflect what you would get if you sold the asset. That is just the way we do it in the financial world.
These assets are special "one of a kind" assets that typically can't be sold. Special rights or patents are good examples. Typically they are just recorded with a value of one dollar. But they are valuable so they are listed for show if nothing else.
This is the last part of the asset section of the balance sheet. As explained above this figure is calculated by getting the sum of the three asset classes.
After the asset section, you will find the liabilities section.
Liabilities are amounts of money the company owes. Examples are loans, bills, and employee compensation.
"Total liabilities" are broken down into "current liabilities" and "long-term liabilities".
This section of liabilities lists all the short-term debt. Any debt that is due within a year is considered a current liability. Typically on a balance sheet, current liabilities will be lumped into two categories:
- Accounts Payable - This category accounts for unpaid bills for things such as goods, services, supplies, rent, etc.
- Accrued Expenses - This category is composed of continually accruing expenses such as salary, taxes, interest on loans, etc.
Any debt or money owed that has a payable date or due date over a year from today is considered a long-term liability. This section is typically where a mortgage debt or long-term equipment loans will be recorded.
Just like with assets you will list the sum of current liabilities and long-term liabilities as the total liabilities for the company. This figure represents all money owed by the company.
This section represents the portion of the company that is owned by the business owners or shareholders. The equity in a company is divided into two sections on a balance sheet. "Capital Invested" and "Retained Earnings"
This section records all outside investments from owners. For example, any cash invested by business owners to start the business. If a company sells shares or portions of the company the money raised from the sale of those shares would be recorded here.
This section records all the profits the business keeps as opposed to paying out to the owners.
Total Liabilities and Owners Equity
This is the last section which is calculated by taking the sum of total liabilities and owners equity. If all has been done correctly this figure will match the total assets figure. Hence the name "balance sheet".