What is a Balance Sheet?
The balance sheet is one of the most important financial statements for business owners as it shows what your business’ owns (assets), owe (liabilities) and how much you and your investors share into the business (stockholders’ equity).
Assets are the things your business owns that have a monetary value. Assets fall into two categories - current and noncurrent assets. Assets are categorized based on the level of ease to liquidation.
Liquidity is determined by how quickly assets could be converted into cash, as cash is the most liquid of all assets. Non-current assets like buildings, equipment, properties etc. are less liquid because they are not that easy to be converted into cash.
Liabilities are all of the business’ debts including mortgages, loans, expenses and any other money that the business owes to outside parties. Just like assets, liabilities can also be long term or short term. Short-term liabilities include costs like rent, utilities, and payroll. Long-term liabilities include deferred income taxes and loans.
Stockholders’ equity is the initial capital invested into the business, together with any other retained earnings that have been reinvested in the business.
The reason we call this the “balance sheet” is simply because your assets should be total to your liabilities plus your stockholders’ equity. Assets = Liabilities + Stockholders’ Equity
Example Balance Sheet
Below is an example of what a balance sheet looks like.
Why Does The Balance Sheet Matter?
If the balance sheet has been done correctly, business will have a deep understanding of its financial health. It is usually alongside two other types of financial statements: the income statement and the cash flow statement.
The balance sheet can help the owners determine and identify if their business has a positive net worth, if it has enough cash and assets to cover liabilities or other obligations and if it is highly indebted relative to their business partners.
Who Prepares the Balance Sheet?
Depending on your skill and comfort level, you can create and update the balance sheet on your own. But to save time and have it done more accurately, it is best to hire an accountant. At Nuve, we can help you prepare your balance sheet and grow your business with us.
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