Financial statements are important reports summarizing the financial accounting information about your business. There are three main types of financial statements: the balance sheet, income statement, and cash flow statement.
These documents give a clear picture of your company's financial position.
The Balance sheet shows your company as it currently stands with assets and liabilities. Your small business can probably make a balance sheet every quarter.
A balance sheet is a picture of your business’s financials at a point in time. The income statement shows you how profitable your business is in an accounting period. The income statement shows you how much you made (revenue) and how much you spent (expenses).
As a small business owner, the first time our accountant asked for our balance statement I had to do a quick Google search! I had no idea what he meant!After taking so much time researching what to do, I came up with a simple BALANCE SHEET. While it sounds overwhelming, breaking it up into pieces, makes it easier to fill in the boxes and help write a picture of your business.
A balance sheet is one of the most important finance documents your company will produce. Read below to figure out how to make a simple BALANCE SHEET.
The balance sheet has 3 parts:
1. total assets
2. total liabilities
3. owner's equity
or more simply put:
Assets = Liabilities + Owner’s (or Stockholders’) Equity.
The balance statement will help you figure out the company's financial performance. Your accountant will probably ask for a balance sheet before the company does your taxes. If you just send in receipts from your year, your accountant will have to figure out your balance sheet for you. While they are happy to do it, it will cost you more and you will miss out on the opportunity to learn it for yourself and the opportunity to better understand your cash flow statement and how much money your company really has.
Copy the balance sheet template below to get started on organizing your balance sheet for the year.
ASSETS
An asset is something valuable your business owns that you can define in dollars. Assets are separated into current and non-current assets based on their liquidity levels.
Current assets would be things like the cash account in the bank or other liquid assets that can be converted into cash within a year’s time frame. In addition to your existing cash reserves and cash equivalents, that includes assets like the following:
Inventory on hand that will turn into cash when you sell it
Accounts receivable, which are unpaid invoices you expect to collect shortly
Prepaid expenses, like rent, that you’ll use up over the next 12 months
Meanwhile, noncurrent assets are those you don’t expect to convert to cash within the next year.
Noncurrent assets are also called fixed assets, which are tangible, long-term assets with a useful life over a number of years. This would be things like property, plant, and equipment, it can also include things like machinery, vehicles, land, and buildings.
Noncurrent assets can also include intangible assets like goodwill and intellectual property that provide economic value for longer than 12 months.
*If you have a small business, you probably won't have anything in the Goodwill column. Goodwill only shows up on a balance sheet when there is a complete merger between companies. When a company buys another firm, anything it pays above and beyond the net value of assets becomes the amount on the balance sheet becomes goodwill.
LIABILITIES
Liabilities represent the economic value that the business owes to another group or party. This would be the amounts the business owes to creditors or any other businesses based on the date of the balance sheet.
Liabilities can be broken down into two sections:
short-term (current) liabilities
long-term (non-current liabilities) liabilities
Current liabilities (short-term liabilities) include financing that is coming due in the next year. Things like credit cards and short-term loans. The business must show that the business has the liquidity to cover the outstanding invoices.
Here are some liabilities that might be included in current liabilities:
short-term loans (that need to be paid within a year)
bank account overdrafts
accounts payable (money you owe to supplies, such as invoices that you haven’t paid yet)
interest and taxes payable
Noncurrent liabilities (long-term liabilities) are financial obligations that are not due within the reporting period of time in the current year.
Here are a few examples of long-term liabilities:
notes payable
mortgage loans
multi-year business loans.
Here is an example of how to include a long-term loan or mortgage with a principle balance on your balance sheet:
Situation: Loan amount: $50,000 with 120 monthly payments remaining
In the next 12 months (from the balance sheet date), there is a $3,000 principal due
Report: Add the $50,000 debt on the balance sheet:
$47,000 listed as long-term liability (paid in more than a year)
$3,000 listed as a current liability (how much paid within a year)
OWNER'S EQUITY
Owner's equity can also be called shareholders’ equity. Use an equation like this to help you find the equity. The OWNER'S EQUITY represents the book value of the company.
Owner’s Equity = Assets — Liabilities
Remember the book value is not the fair market value of the company. It represents the value that would remain if you paid off all the outstanding debts and liquidated your business.
A strong business should have a positive equity account where the assets exceed liabilities. A business that has higher liabilities than assets could have a hard time working with lenders if they need a loan.
An equity account will also have any contributions you have personally made to fund your business or the proceeds from shares you have sold to investors, any profits left in your company from previous years.
A stockholder’s equity can include things such as common stock, preferred stock, retained earnings, and others.
A balance sheet is a statement of the financial position of a company throughout the year. A balance sheet can help an owner to see if the working capital is enough or if more capital is needed. Balance sheets will be needed to get approved for a bank loan along with cash flow statements, income statements, and profit and loss statements.
A company's balance sheet should be something a small business works on quarterly to measure the financial health of the business.
*This isn’t tax advice- please consult with your accountant or tax professional I am just sharing what I have learned, it is by no means a full picture of all the things you need to do during tax season.
