Balance Sheet Basics

The balance sheet is one of the three basic financial statements.  What exactly is a balance sheet? It is a financial statement that shows your company’s financial position at a given point in time.  Essentially, it is a snapshot.  It tells the reader, as of this date, the company has X dollars in cash, X dollars in Accounts Receivable, and so on.

Businesses that have good financial information will produce a balance sheet at least once per month.

The Balance Sheet is based upon what is called “The Balance Sheet Equation,” which is: Assets = Liabilities + Equity.  Assets are the things that the company owns, such as Cash, Accounts Receivable, Inventory, and Equipment.  Liabilities are the amounts the company owes to others, such as Accounts Payable and Loans Payable.  Equity is the difference between assets and liabilities, or stated another way:  Assets minus Liabilities = Equity.  Generally the assets are shown at the amount that was paid for them.

If the Balance Sheet is properly prepared it always balances, meaning, Total Assets = Total Liabilities + Equity.

Forecasted Balance Sheets are ESSENTIAL to include in your business plan because bankers and investors want to know what you believe your financial position is going to be after executing your plan.  It’s also the statement upon which some of the most basic ratios are calculated, including the current ratio, the quick ratio, and the debt to equity ratio.

Remember, the Balance Sheet is only one of the three basic financial statements, the other two being the Statement of Operations (aka, the Income Statement), and the Statement of Cash Flows.  For a simple understanding of the other two basic financial statements, visit the video section at www.CfoOutsource.com.

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