Do you understand your Balance Sheet?
Are you confident in understanding the financial snapshot of your balance sheet?
To understand the financial position of a business at a specific point in time, look at the balance sheet. I find my Balance Sheet has more value than my Profit and Loss Report.
As a bookkeeper, one of the first areas of your business that I look at is the Balance Sheet and 9 times out of 10, it’s not reconciled correctly, therefore the wages payables liability or the GST liability is either under or over-calculated. This discrepancy won't show a true reflection of your business operations.
Personally, I tend to view this report weekly, ensuring my liability accounts are reconciled accurately and ensuring my business obligations are true and correct. This critical information helps me make accurate business decisions.
So, what’s involved? - The balance sheet has three sections: assets, liabilities, and equity.
What are Assets?
Assets are things and resources that a company owns. They have current and/or future value and can be measured in currency.
Assets may be subdivided on the balance sheet into bank accounts, current assets, (receivable within one year), fixed assets, inventory, non-current (or long-term) assets, intangible assets, and prepayments.
These include banks and other financial accounts held, accounts receivable (trade debtors), supplier deposits or bonds, stock on hand, property, equipment, vehicles, investments, and intellectual property. All of these can be translated into monetary value.
What are Liabilities?
Liabilities are amounts owed to suppliers and other creditors for goods or services already received. Liabilities may also include amounts received in advance for future services yet to be provided by the business.
Liabilities are generally subdivided into current, (payable within one year), and non-current liabilities.
These include accounts payable (trade creditors), payroll obligations (salaries, taxes, superannuation), interest, customer deposits received, warranties and loans.
What is Equity?
Equity includes owner funds contributed, drawings, retained earnings and stocks. The value of the equity equals assets minus liabilities.
Transactions that affect profit and loss accounts also affect balance sheet accounts. For example, providing a service increases the accounts receivable balance, which therefore increases the equity.
The Balance Sheet Equation
The balance sheet must always balance! Asset value = liabilities + equity.
For example, if you buy a new vehicle for the business at say 50,000, having paid a 10,000 deposit and taking out a 40,000 loan, the value of fixed assets increases by 50k, but the bank asset value decreases by the 10k deposit paid. The value of liabilities increases by 40k loan, thus leaving the balance sheet balanced on both sides of the equation.
The balance sheet equation shows you how much money you would have left over if you paid all your bills and debts and sold all your assets on a given date. This amount is the Owner’s Equity.
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