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How to Break Down the Balance Sheet

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SmallBusiness.com How-tos are step-by-step instructions for specific small business tasks. They are created and edited by readers like you. You can help edit this How-to or you can create your own. Find more How-tos at the SmallBusiness.com How-to Hub.

Introduction

A balance sheet can be an intimidating document for any small business owner, especially if you have never before encountered one. However, it really is a valuable document to have on hand from time to time for small business owners. A balance sheet simply helps a company understand where it stands financially at a certain point in time. As such, balance sheets can be used to help lendors decide how much credit to extend in a loan application, or some companies use balances sheets to help in preparing tax returns.

The type of data that this type of document contains not only helps businesses avoid costly mistakes but also propels them in the right direction. As PrintPlace.com points out, growing a business and avoiding stagnation is an important part of any company strategy, which is another way a balance sheet can help. If you are planning on starting a postcard marketing campaign or want to move to a larger building, knowing where your company is financially will help you decide what you can afford to invest at this time. Small businesses can see in a single document how much debt they are accruing, what payments need to be collected, and how much cash flow do they really have at their disposal. The more you know about the different aspects of a balance sheet, the better you will be at putting it to good use for your company.

Assets

The Asset section of the balance sheet includes anything of value that the company owns and should basically be divided into current assets and other, more long-term assets. Current Assets should include any checking or savings account balances, cash, any accounts receivable that are due to be paid within one year of the balance sheet, inventory that can be liquidated within a year, or any other item that can be turned into cash within one year of the balance sheet. Inventory is simply raw goods or the business's finished products. So, lumber at a construction site or the products that line any store's shelves are considered inventory. Add these amounts up to see your total current assets

Next are the tangible assets, which include any buildings, land, computers, machinery and equipment, vehicles. A tangible asset is anything that can be sold within a year or less and/or last more than a year in terms of lifespan. Last in tangible assets must be listed the depreciation of the total items listed. For instance, you may have bought your company vehicle for $14,000 a couple of years ago, but you couldn't sell it for that much today. So put the loss in the depreciation line and deduct this from the rest of your tangibles to receive your net tangible asset.

Intangible assets are next. These have an undetermined life and usually never mature into cash, but they are a part of what made you into the brand name you are today. These are all a part of determining just how valuable your brand is. Some of the intangibles are goodwill, market research, organizational expense, patents, research and development, etc.

Deposits and long-term notes receivable from third parties or other miscellaneous accounts fall into the category of other assets. The sum total of the various assets due to the business or owned by the company is referred to as Total Assets.

Liabilities

The Liabilities section of the balance sheet shows what a company owes, and it also represents its funding sources. This component comprises of any notes or accounts payable, wages owed, interest or taxes payable, or any other finances that the company owes to outside creditors, investors, or other parties. Again, liabilities can be divided into current to current or long-term. The current liabilities are those that are due within a year of the balance sheet, including those that only a payment of the total amount owed is due. For instance, you would include a 10-year loan in current liabilities if your next loan payment was due within one year of the balance sheet. The Total Liabilities, of course, is the sum total of these numbers.

Equity

Owners' or Stockholders' equity includes the total amount that was initially invested into the business at the beginning of the year. Owners equity refers to sole proprietorships. Basically, if you took your net earnings, or a portion of it, at the end of the year and reinvested it back into the company, this is your equity. Keep in mind this your net earnings after taxes.

Stockholders' equity refers to a corporation, so the equity is determined through stock holdings. Treasury stock, which is stock that the company repurchased from stockholders, is deducted from the equity balance.

Balancing the Balance Sheet

On one side of your balance sheet, you will have your grand total of Assets. On the other side, you should have your grand total of Liabilities + Equity. For a balance sheet to be, as they say, balanced, your assets total and liabilities plus equity total must be the same. If your balance sheet doesn't balance, then this means you have some forgotten items, wrong entries, or tampered numbers in a few cases. Making sure your balance sheet stays balanced means that you know exactly where your business is at financially at that point in time. You know how much you've invested, where exactly that investment money has gone, and more.

One last, very simple example may help. Let's say you buy a computer and equipment for $2,000. Now, let's say that you put $1,000 down in cash on the purchase and borrowed $1,000 to pay for the rest. So, on your computer purchase balance sheet, you would list the computer for $2,000 under assets, the $1,000 borrowed under liabilities, and the $1,000 cash you paid under equity. Liabilities+Equity=Assets ($1,000+$1,000=$2,000). As mentioned before, this is an extremely simple example but can help you to see the bigger picture of what a balance sheet does.

For small businesses, your balance sheet will be a lot less complicated than for a large corporation. However, if you are struggling to make your balance sheet, well, balance, you may want to hire an accountant to help you get your books in order. Knowing exactly where your business is financially from time to time is well worth the investment.

See also

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