If you are working on the accounting reports for your small business yourself, one of the most important ones to understand is your balance sheet. This details the asset and liability accounts so that you know what your company's net worth is. Here are a few things you should know about this statement before you create one for the first time.
The Asset Section
The balance sheet statement will begin with a review of your company's assets. This includes your current and fixed assets. Current assets are all of the short-term investments, or the ones that will reach maturity or end-of-life within a year. This includes things like accounts receivable, cash, inventory, notes receivable and prepaid expenses.
Fixed assets, on the other hand, are those assets that are anticipated to last beyond the current year. Some examples of fixed assets include large investments like equipment, buildings, land and furnishings. At the end of this section is the summary of the total assets, which is simply a sum of both the current and fixed assets.
The Liability Section
Liabilities are the the things the company owes, such as to investors and creditors. They are defined in current and noncurrent liabilities. The current liabilities, like the current assets, are those liabilities that are expected to be due within a year. This includes things like accrued expenses, notes payable and accounts payable.
The noncurrent liabilities are the long-term ones. They won't come due within the current year. This includes notes payable to shareholders, working capital loans, long-term asset purchases and similar things. It also includes investments made by company officers that must be paid back over time.
At the end of the liability section is the total liability summary. This is the sum of the current and noncurrent liability amounts. This tells you exactly how much your company has outstanding in potential creditor claims on the business.
The Equity Summary
The closing section of the statement illustrates the company's equity, or the difference between the assets and the liabilities. Equity is the value of the business. The goal is to always have more in assets than your company has in liability. This ensures that you are not only able to meet those demands but also still have some value left in the business. If you reach a point where your liabilities exceed your assets, it means your company owes more than it has available to spend.
If you're not confident in your accounting skills, talk with a small business accounting specialist who can help you create these statements and evaluate the condition of your company's finances.
Share25 August 2016
Accounting is the absolute most important element of running a business. If you mess up the bookkeeping even the slightest bit, the entire business could be in trouble. I know how costly a small bookkeeping error can be. About three years ago, I made a seemingly small mistake in the financial records for my business and the next year when I filed my taxes, things were very bad for me. What would have required a small tax payment had suddenly turned into a big tax bill and quite a headache. Since then, I have worked with an accountant and things have been better.