Balance sheets are essential for any business, as they give you a snapshot of your company’s finances at the end of every accounting period. You can use them regularly and see how well (or not) everything is going with liquidity- whether there will be enough money left over after paying bills, if things don’t sell quickly enough, or even before investments mature.
Bookkeeping is an often overlooked but integral part of any business. That’s why I’m so excited to share this blog with you! In it, we’ll break down the balance sheet into its essential elements to make sense of what all those numbers mean for your company and help improve profitability through better management practices.
A balance sheet is divided into assets, liabilities, and equity. The basic formula of the balance sheet states all Assets – Liabilities – Equity.
Assets what is it?
Assets are anything of value that a company owns, including cash, inventory, buildings, and equipment. For reporting purposes, we divide the assets into two subcategories: Current Assets and Fixed Assets.
Go ahead and open your balance sheet for your business, the first section on the top of the balance sheet is the Asset section, and under Assets, we start with Current Assets.
Current assets are all the company’s assets that will eventually become sold or used due to standard business operations over the next year. Current Assets include the following line items:
- Cash and cash equivalents these accounts include your bank accounts, cash registers or POS systems, and savings accounts.
- Accounts receivable (or amounts owed), This account keeps track of how many customers and which customers owe you money, how much they owe you, how long they have been owning, and so on.
- Inventory and marketable securities; these items can fund daily expenses for your startup while also paying off debts in due course – making them extremely important!
What to take away from current assets?
In short, when you run a report for the balance sheet, look for the current asset sections and see if there are any negative amounts. If there is, speak to your bookkeeper to make the necessary adjustments to correct this problem. The negative amounts could be from a line of credit, for example.
You might wonder why I referred to your line of credit ending up in the current assets. If you were wondering about this, then good for you, as a line of credit is a current liability. In Quickbooks online, for example, you need to set up any bank account as a bank account in the current assets section to set up the bank feeds. Not to worry, there is a simple adjustment your bookkeeper can make at the end of the reporting period to move this negative amount to the correct section of the balance sheet. Feel free to contact me if you need help.
The only negative amount that should be in this section is provided for bad depth.
What is a Fixed Asset?
Fixed assets are any property with a useful life greater than one reporting period that exceeds an entity’s minimum capitalization limit. These items aren’t purchased for immediate resale but for productive use within the company. A fixed asset appears on your books at its net book value, usually determined by taking away accumulated depreciation from when you bought it until the day you want to dispose of it. More about accumulated depreciation later. Let’s look at some examples of fixed assets.
- Property – This could be the office you work from or a warehouse you have. This is a property.
- Vehicles – This should be self-explanatory.
- Equipment – Depending on the industry, this could range from the equipment you can move to stationary equipment you use in a production line.
These are the primary line items. If you are renting and building and have made some improvements, you will also see a line item called Leasehold Improvements. The list above is by no means exhaustive, but as a small business owner, these line items will be most prominent.
Ok, as with current assets, we don’t want to see negative amounts in the Fixed Asset section, except for one:
Accumulated Depreciation, what is it?
To understand accumulated depreciation, we must first discuss depreciation. For example, you buy a new truck for your business, costing $50,000.00. To keep it simple, I’m not going to consider finance.
As this is a capital asset, CRA will not allow you to expense the $50,000.00 all at once. That is why we put it on the Balance Sheet. At this point, you should be thinking, but if I drive the truck, it will go down in value, and you are right. This decline in value is called depreciation. CRA agrees with you and therefore has established specific rules that will allow you to expense a part of the asset every year over the lifetime of the assets. This deduction is a tax deduction that will benefit you.
So, where does accumulate depreciation come into play, accumulated depreciation is the total of every year’s depreciation for that asset, and the value of the assets less the accumulated depreciation is called the asset’s book value.
Liabilities:
Current Liabilities, what is it?
Current liabilities are debts that need to be paid in a short period. A company must pay off these with careful management, as opposed to long-term obligations that can take beyond 12 months from when they’re due or settled upon occurrence, if not sooner than this juncture.
We want a positive number in this section, like current assets. Examples of current liabilities include the following:
- Accounts Payable
- Sales Tax Payable
- Income Tax Payable
- Payroll Tax
- Credit Cards
Just to name a few.
Non-Current Liabilities:
Noncurrent liabilities, also called long-term liabilities or long-term debts, are long-term financial obligations listed on a company’s balance sheet. These liabilities have obligations that become due beyond twelve months in the future, as opposed to current liabilities, which are short-term debts with maturity dates within the following twelve-month period.
Examples of long-term liabilities include:
- Mortgages
- Car Loans
Just to name a few.
Equity:
If you have been stuck reading the blog and don’t consider yourself a numbers person, I want to commend you, but keep reading.
Equity can become very completed, but to keep it simple, take all the Assets and DEduct all the Liabilities. The answer, you guessed it, it’s equity.
Conclusion:
As a business owner, you are not expected to become a pro on the balance sheet. That is why you have a bookkeeper and Accountant to help you. That being said, you would give yourself a significant advantage by familiarizing yourself with the balance sheet and understanding the difference between Assets, Liabilities, and Equity.
If you need help, please contact me for a free consultation. I would be happy to help.
