A balance sheet offers an aerial view of a specific business’ financial status at any given moment, although it is usually only used at the end of an accounting cycle such as a month, quarter or year.
This may sound similar to an income statement, but where it differs is in the details: a balance sheet is filled with the details of a business’ assets, liabilities and equity, whereas an income statement focuses on the profits and losses.
How Can an Entrepreneur Use a Balance Sheet?
Balance sheets are used by entrepreneurs to determine whether or not the business is in a strong position to grow financially.
For instance, the balance sheet should easily show whether or not an entrepreneur can take the risk to invest in a business!
Why Are Balance Statements Important to Entrepreneurs?
Balance sheets, in addition to income statements, are the most important records in an entrepreneur’s financial reporting system, and therefore are required by law in many countries like Morocco/France/USA. Most lenders, investors and/or vendors will need to see a business’ balance statement before making a decision regarding credit and equity.
What are the items that comprise a balance sheet?
The following items comprise a balance sheet:
Current Assets Current assets include any items that can be liquidated into cash within a calendar year. These include:
Cash: the most liquid of all assets.
Accounts receivable are also highly liquid, although they make take a bit longer to receive depending on the payment cycles the business has requested from its clients, and include any money owed to the business by suppliers or customers through purchases made.
Fixed Assets Fixed assets include:
Land is a fixed asset, but unlike the others in this list is not considered depreciable because it does not lose value over time or wear out.
Office equipment such as fax machines, telephones and computers used to run the business.
Machinery used to produce products to sell for profit are also added to the fixed assets list.
If there are vehicles used in business operations, they are added here.
Total Assets All of the fixed assets are then totaled together, minus any depreciation.
Liabilities and Owner’s Equity This part of the balance sheet may be named liabilities and include all debts the business owes such as:
All of the liabilities and owner’s equity are totaled together, and should equal the amount of assets if calculated correctly.