In its most basic form, a company’s balance sheet is a snapshot of its net worth for a single point in time. These sheets are typically configured during each quarter of a fiscal year, although some business owners choose to calculate them monthly. The sheet provides information on the company’s assets and liabilities. Each side of the sheet must equal the other, which contributes to its name. Once you understand its basic format, reading a balance sheet is much easier.
The Basic Anatomy of a Balance Sheet
Depending on how your balance sheet is laid out””either vertically or horizontally””everything your company owns, known as its assets, will be at the top or on the left side. It may also be labeled as debits if you are not the one creating the sheet. On the bottom or right side is the company’s liabilities, which might also be labeled as credits. Finally, there will be an equation that equals the amount of equity your small business has. Most companies prefer to stick to using the terms assets and liabilities because they are less confusing.
More on Company Assets
The things your company owns are its assets. This section of your balance sheet includes current assets such as cash, bank accounts, marketable securities, inventory and so on. The sheet will also include your company’s fixed assets. Sometimes called intangibles, these include things such as trademarks, copyrights, patents or licenses. Vehicles and other property””even property still technically owned by the bank””are also fixed assets. Even your office chairs and printers are considered fixed assets. Investments such as stocks and bonds are additional assets that should be included on the sheet. Don’t forget to list your accounts receivable, which is money people owe you but haven’t yet paid.
More on Company Liabilities
You can’t run a good company unless you spend money, so having liabilities is not only normal, it’s expected. Liabilities include long-term debt such as mortgages as well as any other accounts payable. Factor in company credit card debt, money your business still owes to vendors or suppliers and anything else you can think of. Basically, anything your company must pay is a liability. Despite liabilities being expected, it is still important to be sure to make more than you spend. Consistently owing more than the company brings in will become a problem. If this is happening within your business, take a long, hard look at your finances and decide where you can cut back on spending or if there are ways you could create more assets. One popular way business owners choose to save money is by cutting underperforming products or services.
How to Calculate Shareholder Equity
To calculate your company’s shareholder equity, better known as net worth, simply subtract its liabilities from its total assets. You should always double-check your work by using the following formula.
“Assets = Liability + Equity
If you add your company’s liability and its equity together and you don’t get the number you have listed in the column for assets, you’ve made a mistake somewhere.
Keep in mind that your company’s equity is not normally equal to how much it would be worth if you decided to sell. Businesses are usually sold based on a multiple of their earnings, which means they are usually worth more than the shareholder equity.
Your small business balance sheet is a vital tool for ensuring your company runs smoothly and operates within its financial means. Some business experts recommend a business owner checks and amends the company’s balance sheet every month and all of them agree it should be done at least once per quarter in each fiscal year. By keeping the above information in mind, creating and reading a balance sheet will become much simpler.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.