Balance sheets are one of the most basic business accounting tools, and understanding balance sheets is a good thing for any small or online business owner to grasp before diving into the financials of running a business.
What is a Balance Sheet?
Balance sheets are generally brief financial statements that give a general overview of the financial state of a business, including factoring in assets, liabilities, and equity. Balance sheets cover very specific periods of time, such as a company’s fiscal year.
Assets = Liabilities + Owner’s Equity
The “balance” part of the term balance sheet comes from the fact that a business owner’s assets should equal their liabilities plus owner’s equity, thus creating a balance in the company’s financial records.
Assets
Assets are things of value owned by the company (bank accounts, vehicles, equipment, etc.).
Liabilities
Liabilities are things that the business owes, such as rent costs for a leased location.
Owner’s Equity
Owner’s equity is essentially what the owner of a business has invested into it (such as infusing the company bank account with funds from a personal account).
The Balance Sheet Layout
Balance sheets are broken into two columns. Much like the equation given above, the asset accounts are listed on the left and the liability and equity accounts are listed and accumulated on the right side of the balance sheet. This provides a simple snapshot of accounts on both sides of the equation, letting a business owner see what they own, owe, and have invested, and whether or not they have their records properly balanced through the column totals.
Who Needs Balance Sheets?
All business owners should keep a balance sheet, in addition to other basic financial statements, to be able to quickly monitor trends in their assets and expenses. While a business owner would be the most interested party in a sole proprietorship, other types of businesses also need to keep balance sheets, especially those needing to account for shareholder equity rather than that of a single owner.