You are bound to come across reference to a ‘Balance Sheet’ at some point when looking into accounts for businesses, particularly for larger ones with a ‘full’ set of accounts being involved.
They’re a key part of the accounts, and therefore as a core financial statement they may be called a Statement of Financial Position. Even if you don’t automatically have one of these, then it’s certainly worth looking into one being provided and understand what they will communicate.
Three Simple Elements
Without getting bogged-down with the detail and numbers, it’s essential to know the very basic principles of what these are all about. This will help then cut through all the financial jargon and get to the bottom-line of what these are trying to communicate to people.
So, here are three simple elements to explain these.
1. The Meaning
The idea is to have a look at what the financial position is of say a business at just one point in time. So rather than over a period of time, this is a one-off glimpse of how things are right at that point.
And in short, you’re then looking at both the good and the bad things to see how this all pads out. So hopefully you have more beneficial finances to note, otherwise known as Assets, rather than not so good ones knows as Liabilities - which leaves you with some profit and money.
2. The Balance
So, a balance sheet has three sections to log this basic idea.
Firstly, as Assets column which shows what a business owns and has obligation to that is of benefit to them. So, it might be stock or equipment in the business that of course has a value to it.
Secondly, the liabilities are what you still have to pay out on and cover, maybe a business loan or long-term agreement.
And thirdly, if you take off one from the other, you get the resultant equity or what is sometimes called Net Assets, Capital, or New Worth. In short, it’s the end-value or money that you have left at that point in time once you’ve taken off what you owe from what you have.
3. The Allocations
So, once you have the three areas clear you just need to make sure that you know where individual items fall within the Assets and Liabilities.
Simple in principle, however, be careful of certain items being split between the two.
So, taking a business loan out will incur a liability for the re-payments then due, but then once you receive this lump-sum it can go into Assets as cash in the bank, or when this is spent on items noted as assets in there as well.
Balancing the Balance Sheet
As you begin to understand what these Balance Sheets and Statements of Financial Positions are all about, it’s good to start seeing how this is a snapshot of what the finances are at a certain point in time.
You can then see how it’s like two things balancing out to create a resultant profit (and hopefully not loss). Whatever liabilities you have are taken off the assets you hold, and voila – you have a retained profit!
It’s then a case of making sure everything fits into one of these categories, and that they are all correctly balanced against each other.