Vitago

Friday, I covered the basics of the Income Statement. Today we’re going to look at the balance sheet. You may recall the balance sheet helps the viewer understand the status of the business by listing the types and amounts of assets, liabilities and equity. Another name for the balance sheet is the statement of financial position.

Assets put money in your pocket. Liabilities take money away. And equity is the money left after your debts are paid.

The Balance Sheet

Notice how similar the header is to the income statement with the company name at the top and the document title and date just below.

Once again, I’ll point out that the time period being covered is critical for understanding. Unlike the income statement that covers a period of time, a balance sheet is a snapshot.
On the left are the assets. Assets include cash on hand, supplies and equipment. One way to look at assets is that they are the things that make you money or can be sold for cash.

On the right we start with the liabilities. Basically, liabilities are the bills (accounts payable) or anything that must be paid to make money.

Below the liabilities is the Stockholder’s Equity. Contributed capital, also called paid-in capital, is the money the investors put up. Retained earnings are the stockholder’s share of the profit.

Take note the totals on each side match. This is why this document is called the “balance sheet”. It should literally balance. Your assets equal your liabilities plus equity. If it doesn’t something is wrong.

The balancing of accounts is not the only purpose for the balance sheet. The balance sheet also reveals what the mix of assets, liabilities and equity are. Your goal should be to minimize liabilities while maximizing equity.

You can download the Sample Balance Sheet and see how everything is laid out. Try plugging your own numbers in to see your business the way an investor - or bank - might.

This entry was posted on Wednesday, October 24th, 2007 at 10:27 pm and is filed under Accounting. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.