Keeping accurate and up-to-date accounting records is a critical part of being a business owner. Your books hold a wealth of information about the financial state of your business that you can use to make savvy decisions.
Accounting reports take the data stored in your books and present it in an easy-to-understand format. There are different types of reports that each serve an unique purpose. In this blog post, we’ll learn about the Balance Sheet.
What is a Balance Sheet?
A balance sheet provides insight into a business’s financial situation at a given time and is used to ensure the books are accurate. It consists of three sections: assets, liabilities, and the owners/shareholders equity.
Assets
An asset is anything owned by your business that has a monetary value. This section of the balance sheet will outline the value of each of your business’s assets. Some examples include:
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Cash – The funds your business possesses, including the cash in your back account.
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Accounts Receivable – Outstanding invoices your business is awaiting payment for.
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Inventory – Items your business resells in its effort to generate revenue.
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Equipment & supplies – Tangible items used in your business operations.
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Reimbursable expenses – Expenses incurred by your business that will be paid back by another party.
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Property – Building or land owned by your business and used in its operations.
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Prepaid insurance – Current policies that have been fully paid for.
The purpose of this section is to calculate the total value of your business’s assets.
Liabilities
A liability is any debt owed by your business. The liability section of the balance sheet will include the total amount of debt your business owes. Some examples include:
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Accounts Payable – Funds owed by your business to other parties, not including loans.
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Taxes Payable – Money owed to the government for taxes.
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Payroll Payable – Funds that are to be paid to employees for the wages they’ve earned.
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Loans Payable – The balance of any loans from a bank or investor that needs to be paid back.
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Credit Card Payable – The balance of any credit cards your business or employees use.
The purpose of this section is to calculate the total value of your business’s liabilities.
Owner/Shareholder Equity
Owner/shareholder equity is the value of assets that remain after the total value of liabilities has been deducted. It’s generally considered the source of the company’s assets. Some examples include:
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Owner/Shareholder Capital – Investments made into the company. Including net income earned, minus withdrawals made.
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Retained earnings – Net income that stays in the business, instead of being paid out in dividends or as payment to the owner.
What if your Balance Sheet doesn’t balance?
In the simplest terms, a balance sheet is Liabilities + Owner/Shareholder Equity = Assets. Like the name implies, this equation needs to balance in the end. If it doesn’t, you likely misrecorded a number, listed something in the wrong section, or left it off altogether. Here are some tips that can help you avoid mistakes:
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Always review your entries for accuracy.
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Make sure all withdrawals made by ownership are included in the equity section.
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Use automated financial software to avoid human error.
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Have a professional prepare your Balance Sheet.
Accounting reports shine a light on the different financial areas of your business. BookKeeping Express (BKE) can ensure your books are always updated and accurate and generate the financial reports you need to make smart business decisions. See how we can handle your bookkeeping needs so you can focus on what you do best.