What is a Balance Sheet and What Can It Tell Me?
In a previous post, we addressed the P&L. The other important financial statement is the Balance Sheet. One way to think of it is a report of what you own and what you owe. It has three major components, and they create the accounting equation: Assets = Liabilities + Equity
Examples of Assets:
– Cash, receivables, and inventory
– Real estate, vehicles, and equipment
Examples of Liabilities:
– Accounts Payable, taxes you owe and credit cards
– Loans or other long-term obligations
Examples of Equity:
– Contributed capital, or conversely, owner’s draw
– Retained Earnings (the cumulative profit over time)It is a snapshot of you company’s financial position at any point in time. Understanding these balances will help determine the health of the company.
For example, subtracting the current liabilities from current assets will represent the amount of working capital in the business (or lack thereof). Or if there is negative retained earnings, that means your business has cumulatively had greater losses than profits over time.
Even if your balance sheet doesn’t affect your tax return, you should still keep it clean because it’s the yin to the P&L’s yang, the peanut butter to its jelly, the Robin to its Batman… You get the idea.