The Balance Sheet is a statement of financial position – a financial statement that summarizes a company’s Assets, Liabilities, Intangibles, and Owner’s Equity. Assets are broken down into Current, Fixed, and Other categories. Liabilities are broken down into Current and Long-Term liabilities. Equity is broken into Shareholder, Retained Earnings, and Income for this year.
Current Assets are items that can be exchanged for cash in the current year, things like your bank account, accounts receivable – your client invoices, inventory, and any other items you have that can easily be converted into cash.
Fixed Assets have a commercial value but will not be converted to cash or consumed in the business. These are items like furniture & equipment, vehicles, land, and leasehold improvements.
Other Assets are assets that may not be converted to cash in the coming year like prepaid expenses.
Current Liabilities are items that are due and payable in the coming year. Accounts Payable, payroll liabilities, taxes, leases, current portions of loans are items that will be taken care of in the coming year.
Long-Term Liabilities are liabilities not payable in the coming year. Things like future taxes, the balance of a loan that is not due in the coming year but will be repaid in future years.
Intangibles are items like goodwill, trademarks, patents, etc – intangibles are a significant factor in the value of your business.
Equity is the value of all assets less the liabilities. When you start your business and you have no earnings the equity part of the balance sheet is the difference between your assets and liabilities. As you grow you will realize a profit or loss and this will affect your equity position. The profit/loss will roll into your retained earnings which is part of your equity section.
Your total assets less your total liabilities will equal your total equity. The Balance Sheet states your Assets, Liabilities, and Equity which is a good indicator of your financial position at a given point in time. The Balance Sheet is one financial statement that lenders rely on because it gives a good financial picture at a given point in time as to how well your company is performing.