A balance sheet, also known as a Statement of Financial Position, is an overview of a company’s assets, liabilities, and equity at the moment in time. Unlike a P&L statement, which compares revenue and costs over a period, a balance sheet is recorded for any given day, at any given time. A balance sheet is one of 3 statements that companies issue to shareholders or creditors at the end of a financial period. If your company is privately owned, these statements are highly recommended. They will give you an idea of how well your company is doing and where your equity lies on the margin of negative vs. positive. In this article, we will be discussing what a balance sheet is, what it covers, and the basic formats that can be used. To avoid confusion, we will outline the basics of a balance sheet in easy to understand terms and examples for new business owners who may not have expertise in accounting terms.
Balance Sheet Format
Balance sheets follow two types of formats: account form and report form. The difference between the two is the number of columns. An account form has two columns: assets on the left, liabilities, and equity on the right. A report form is a single column that starts with assets, followed by liabilities, concluded with equity. Most business owners choose to use a more concise report form. Like most assignments, the title of your company is listed at the top, followed by “Balance Sheet,” and the date. Assets are always listed first, followed by liabilities, and equity with no exception. Within these three categories, each has three subcategories. Next, we will look into each category and what the subcategories entail.
Assets
Assets are items that your company owns that have a monetary value. As stated before, Assets and Liabilities have three subcategories: current, long-term, and “other.” On your balance sheet, assets should be listed in order of liquidity (how quickly it can become cash in your hand.)
Current Assets
Current assets are assets that can be turned into cash instantly, or within 30 days. Such things include:
- Bank accounts
- Accounts receivable (money that customers owe you)
- Inventory
Long-term assets
Long-term assets are assets that can be turned into cash but over a longer period. Unlike current assets, which can be turned over instantaneously or within 30 days. Long-term assets depreciate over time, so besides each long-term asset, depreciation value is subtracted. For example, you bought a car brand new, for $10,000. In 2 years, the car’s value goes down to $7,000. Your depreciation is $3,000. Depreciation values are the only negative numbers you’ll find in the asset category of your balance sheet. Long-term asset examples are:
- Equipment
- Vehicles
- Long-term notes receivable (if you are not getting paid by a customer within 30 days)
- Buildings (most of the time don’t depreciate, they go up in value over time)
- Leasehold improvements
- The amount a business spends to improve a space so that it functions properly for them and their customers, as long as they are leasing the space. Leasehold improvements, also known as tenant improvements, lose value each year of the lease until they are valued at zero on the day the lease expires. You can write them off the lease term as depreciation on your taxes.
Other Assets
The “other” category is negotiable, depending on your company. These assets are notably intangible. Examples of these other assets include investments, goodwill, trademarks, and licenses.
Liabilities
Liabilities are what your company owes, rather than Assets, which show what you own. Liabilities also come in three subcategories: current, long-term, and owner’s debt.
Current Liabilities
Current liabilities, like the previous format, are always listed first. A simple definition of current liabilities is debt or other dues that need to be paid during the current billing period. Examples of current liabilities are as follows:
- Accounts payable
- Bills you need to pay
- Accrued liabilities
- These are expenses your company accounts for ahead of time, such as payroll, taxes, and interest
- Lines of Credit
- What you owe on your credit cards.
- Loans
- These can be short-term loans or payments on long-term loans that are due within the next 30 days.
Long-term Liabilities
Long-term liabilities are accounts payable that aren’t due to be paid in full within the next 12-month period. Depending on the size of your company, Long-term liabilities may be summarized in one category or expanded into subcategories. Long-term liabilities may also be referred to as long-term debt or non-current liabilities. Examples of long-term liabilities include:
- Pension/Health care obligations
- Long-term loans
- Equipment loans, auto loans, etc.
- Long-term leases that cannot be terminated
- Bonds payable
Owner’s Debts
Sometimes, instead of taking out a traditional bank loan, owners of companies will loan their own money to the company. If this applies to your company, creditors, or others who will be looking at your balance sheet want to see these types of loans separately. This is where you input the amount due to shareholders or owners of a company.
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