Balance Sheet

Cook The Books

What is a balance sheet?

A balance sheet is a summary of what a company owns and owes at one time. It is a snapshot of its financial situation.

Balance sheets are one of the major financial statements that are used by businesses, accountants, and entrepreneurs. They show a company’s:

  • Assets
  • Liabilities
  • Owner’s equity

Assets = Liabilities + Owners’ Equity

What are assets?

Assets are the company’s belongings that have future economic value in dollars.

  • Cash
  • Accounts Receivable
  • Inventory
  • Supplies
  • Land
  • Patents, Copyrights, Trademarks
  • Goodwill (value of a company’s brand name, solid customer base and employee relations, etc.)

Main assets are usually listed first on the balance sheet, and they often appear in order of liquidity.

What are liabilities?

Liabilities are things that the company owes to other parties.

  • Accounts Payable (money owed to suppliers)
  • Salaries Payable
  • Customer Deposits
  • Bonds Payable
  • Tax Payments
  • Warranty Payments

What is owner’s equity?

Owner’s equity is the source of the company’s assets. It represents the assets left after deducting the liabilities. In other words, it is the money you would have left over if you sold your company and all of its assets after paying off everything you owe. There are two types of owner’s equity:

  • Paid-in Capital – investments made in the corporation by owners and stockholders
  • Retained Earnings – earnings not paid out to stockholders

Calculator: Who wants to be a millionaire?


Why is it important?

Balance sheets are helpful because bankers can use the information to figure out if the business is on the right track for loans or credit. Most balance sheets include data from the previous year(s) to see how the company is doing over time. Balance sheets also allow a creditor to see how much a business has earned, in addition to how much it owes to other parties.

Example of a balance sheet

Notice how in this balance sheet the left equals the right.

Total assets should always equal total liabilities plus owner’s (or stockholders’) equity.

Fun facts:

  • Petty Cash on a balance sheet consists of a small amount of cash in a fund that is used for minor purchases instead of writing a check or other types of payment.
  • A balance sheet reveals a company or person’s net worth. In 2015, the person with the highest net worth was Bill Gate’s, with $79.2 billion (which is enough to buy every home in Boston).
  • Even though it sounds bad, negative goodwill is actually good for a business owner! It’s when a company buys another business for a bargain price.

 

References

  1. http://www.accountingcoach.com/balance-sheet/explanation
  2. http://www.accountingcoach.com/balance-sheet/explanation/
  3. http://www.encyclopedia.com/topic/Balance_Sheet.aspx
  4. http://www.apapracticecentral.org/business/finances/balance-sheet.aspx

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