The balance sheet is a very important financial statement that summarizes a company’s assets (what it owns) and liabilities (what it owes). However this is useful to gain insight into the financial strength of a company. You can also see how the company resources are divide and compare the information with similar companies.
No balance sheet statement is complete without an income statement to go along with it. As a small business owner, I find the income statement to be more useful in the general operation of the business. However the balance sheet is still a critical accounting tool that provides a key piece of information.
Balance sheet meaning
The balance sheet informs company owners about the net worth of the company at a specific point in time. This is by subtracting the total liabilities from the total assets to calculate the owner’s equity, also known as shareholder’s equity or simply the net worth.
Download our free Balance Sheet template, designed for the small-business owner. It includes common financial ratios and works well for a two-year comparison. See below for more information on the different asset and liability categories.
Balance Sheet Formula
The Accounting Equation: Assets = Liabilities + Owner’s Equity
Balance sheet accounts
Current Assets
The term current in a balance sheet generally means “short-term” which is usually one year or less. Common current assets includes cash (cash, coin, balances in checking and savings accounts), accounts receivable (amounts owed to your business by your customers usually within 10-60 days), inventory (goods for sale), and prepaid expenses (e.g. insurance and rent).
Long-Term Assets
These assets include long-term investments,
- cost of property and equipment (e.g. land, buildings, equipment, tools, furniture, computers, vehicles, etc.)
- offset by accumulate depreciation,
- intangible assets (e.g. patents, contracts, trademarks, copyrights, and goodwill), and other assets (like defer income tax arising from the loss of value of property that can’t be as a tax deduction until the property is sold).
Current Liabilities
These include the obligations to pay within one year, including accounts payable, short-term loans, income taxes payable, wages, unearned revenue , and the current portion of long-term debt.
Long-Term Liabilities
These include long-term debt (notes, mortgages), capital lease obligations (leases structure as loans), and deferred income tax (the tax due on the increase in value of an investment security).
Owner’s Equity (or Stockholders’ Equity for corporations)
This is basically the amount left over when you subtract Total Liabilities from Total Assets. It includes the owner’s investment(s) and retained earnings (the portion of the profits reinvested in the business).
