A balance sheet, also known as statements of financial position, is a snapshot of a business’s financial condition at a specific moment in time, usually at the close of an accounting period. A balance sheet comprises assets, liabilities, and owners’ or stockholders’ equity. Assets and liabilities are divided into short- and long-term obligations including cash accounts such as checking, money market, or government securities. At any given time, assets must equal liabilities plus owners’ equity. An asset is anything the business owns that has monetary value. Liabilities are the claims of creditors against the assets of the business.
What is a balance sheet used for? According to dLoewi.com, a balance sheet helps a small-business owner quickly get a handle on the financial strength and capabilities of the business. Is the business in a position to expand? Can the business easily handle the normal financial ebbs and flows of revenues and expenses? Or should the business take immediate steps to bolster cash reserves?
Balance sheets can identify and analyze trends, particularly in the area of receivables and payables. Is the receivables cycle lengthening? Can receivables be collected more aggressively? Is some debt uncollectable? Has the business been slowing down payables to forestall an inevitable cash shortage?
Balance sheets, along with income statements, are the most basic elements in providing financial reporting to potential lenders such as banks, investors, and vendors who are considering how much credit to grant the firm.
Assets
Assets are subdivided into current and long-term assets to reflect the ease of liquidating each asset. Cash, for obvious reasons, is considered the most liquid of all assets. Long-term assets, such as real estate or machinery, are less likely to sell overnight or have the capability of being quickly converted into a current asset such as cash. Total assets represents the total dollar value of both the short-term and long-term assets of your business.
Current assets
Current are any assets that can be easily converted into cash within one calendar year. Examples of current assets would be checking or money market accounts, accounts receivable, and notes receivable that are due within one year’s time.
Cash: Money available immediately, such as in checking accounts, is the most liquid of all short-term assets.
Accounts receivables: This is money owed to the business for purchases made by customers, suppliers, and other vendors.
Notes receivables: Notes receivables that are due within one year are current assets. Notes that cannot be collected on within one year should be considered long-term assets.
Fixed assets
Fixed assets include land, buildings, machinery, and vehicles that are used in connection with the business. Total fixed assets is the total dollar value of all fixed assets in your business, less any accumulated depreciation.
Land: Land is considered a fixed asset but, unlike other fixed assets, is not depreciated, because land is considered an asset that never wears out.
Buildings: Buildings are categorized as fixed assets and are depreciated over time.
Office equipment: This includes office equipment such as copiers, fax machines, printers, and computers used in your business.
Machinery: This figure represents machines and equipment used in your plant to produce your product. Examples of machinery might include lathes, conveyor belts, or a printing press.
Vehicles: This would include any vehicles used in your business
Liabilities and owners’ equity
This includes all debts and obligations owed by the business to outside creditors, vendors, or banks that are payable within one year, plus the owners’ equity. Often this side of the balance sheet is simply referred to as “liabilities.” Total liabilities and owners’ equity: comprises all debts and monies that are owed to outside creditors, vendors, or banks and the remaining monies that are owed to shareholders, including retained earnings reinvested in the business.
Current liabilities
Current liabilities include all liabilities due to creditors that must be paid within a one-year time frame.
Accounts payable: This includes all short-term obligations owed by your business to creditors, suppliers, and other vendors. Accounts payable can include supplies and materials acquired on credit.
Notes payable: This represents money owed on a short-term collection cycle of one year or less. It may include bank notes, mortgage obligations, or vehicle payments.
Accrued payroll and withholding: This includes any earned wages or withholdings that are owed to or for employees but have not yet been paid.
Long-term liabilities
These are any debts or obligations owed by the business that are due more than one year out from the current date.
Mortgage note payable: This is the balance of a mortgage that extends out beyond the current year. For example, you may have paid off three years of a 15-year mortgage note, of which the remaining 11 years, not counting the current year, are considered long-term.
Owners’ equity
Sometimes this is referred to as stockholders’ equity. Owners’ equity is made up of the initial investment in the business as well as any retained earnings that are reinvested in the business.
Common stock: This is stock issued as part of the initial or later-stage investment in the business.
Retained earnings: These are earnings reinvested in the business after the deduction of any distributions to shareholders, such as dividend payments.
Value measurement
Although a balance sheet presents an enterprise’s financial position, it does not purport to report its real value. It can be explained by some following reasons.
The values of certain assets, such as human resources, secret processes, and competitive advantages are not included in a balance sheet despite the fact that they have value and will generate future cash flows.
The values of other assets are measured at historical cost, rather than market value, replacement cost, or specific value to the enterprise. For example, property and equipment are measured at original cost reduced by depreciation, but the underlying asset’s value can significantly exceed that adjusted cost and the assets may continue to be productive even though fully depreciated in the accounting records.
The values of most liabilities are measured at the present value of cash flows at the date the liability was incurred rather than at the current market rate. When market rates increase, the increase in value of a liability payable at a fixed interest rate that is below market is not recognized in the balance sheet. Conversely, when interest rates decrease, the loss in value of a liability payable at a fixed rate in excess of the market rate is not recognized.
