Balance sheets are a fantastic tool for helping you assess the performance of your business, and should be a part of the financial model in your business plan. Categorizing your assets, liabilities and equity, your balance sheet should show that your total assets equal the sum of your total liabilities and total equity. If this isn’t the case, then it doesn’t mean that your business is performing badly, rather that there has been an accounting error.
One way of preventing such errors, and ensuring that your balance sheet has everything factored into it that it should have, is to outsource your accounting needs. Balance sheets can be complex, but by working with a professional bookkeeping provider, and having a basic understanding of balance sheets yourself, you can get a much more rounded and accurate evaluation of the health of your business.
Check out the following short guide to balance sheets and what should be included in them:
Current and long-term assets
There are two categories for assets: current and long-term, and below are some examples of common current assets:
- Cash – this is the money you have available in a bank or other location
- Accounts receivable – money owed to your business that has yet to be received
- Inventory –this includes items that are used up as a direct result of fulfilling customer orders, and that need to be replenished to continue fulfilling orders
- Furniture, fixtures and equipment – otherwise referred to as FFE, this includes any tangible objects purchased by your company to help make money for the business, but which are not used up and replenished
- Intellectual property – involving tangible assets such as patents, copyrights and trademarks, these don’t often apply for smaller businesses
- Depreciation – while not a cash expense, depreciation is still factored into a balance sheet as long-term assets depreciate over time
Current and long-term liabilities
As with assets, there are two groups for liabilities: current and long-term, and below are some examples of current liabilities:
- Accounts payable – including any non-outstanding monies owed by your business but not yet paid, accounts payable also includes recurring bills paid on a monthly basis, but which don’t involve paying off any outstanding debt over a long period of time.
- Current borrowing – not as common, current borrowing is when you have a line of credit for your business and the cost of your monthly purchases are considered as current borrowing until your credit card bill has been paid.
Equity
Below are some examples of equity that might be expressed in the balance sheet:
- Paid-in capital – commonly made when a business starts, paid-in capital factors in any financial contributions made by the owner into the business.
- Earnings – this describes your net profit or loss for the whole period in which you are reporting
- Retained earnings – retained earnings factor in your accumulated net profit or loss from previous years, rather than your net profit for the current reporting period, as is the case with earnings
As you can see, there are many elements of a balance sheet that have the potential to become complex, but with professional assistance such as from an outsourced accounting company, you can ensure that they’re always accurate, and can always be used as a tool to help you evaluate the health of your business.