The balance sheet, also called ‘statement of financial position’ is an important tool for understanding the health of your business. In summary, this sheet shows your company’s assets, liabilities, and equity. And to put it simply, it is called a balance sheet because your assets must equal your liabilities plus your equity (Assets = Liabilities + Equity)
Overview of what is in a balance sheet
The first side of the balance sheet is Assets. This can include Current or Fixed Assets.
Current assets include your cash on hand, cash at the bank, accounts receivable (money owed to the company), and short-term investments. These items will fluctuate more from year to year.
Fixed assets, on the other hand are long term resources that are not likely to change in a hurry. This includes property and equipment as well as investments, intangible assets like intellectual property rights and biological assets like plants and animals.
The second side of the balance sheet is Liabilities and Equity.
Long-term liabilities are items you expect to pay in more than a year, like bank loans.
While Current or Short-term liabilities are items you expect to pay for or could be expected to pay for during the next 12 months, like short-term loans, creditors, and overdraft charges.
Equity is the accrued balance of amounts invested in the company combined with past profits.
When liabilities are added to the equity, it should equal the total assets. If a negative equity shows up in the balance sheet, a company might be in trouble.
The balance sheet can tell you the overall value of your business as to whether you owe more money than what you currently have or the current value of your assets. This sheet is a vital financial statement you should be reviewing regularly as it changes with every transaction. If you know how to interpret your balance sheet, taking control of your business finances is as easy as 1-2-3! The balance sheet can already provide you warning signs that may help you solve any problem before they destroy your business. Understanding your balance sheet can allow you further to have an informed discussion with your financial advisors.
If you would like us to help you, contact W Advisory’s team of chartered accountants, CPAs and bookkeepers. We can help you identify areas where you need to take action.
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