• September 8, 2020 at 10:08 pm #102394
    Natalie Paris
    Participant

    Check out this post to learn about the three parts of your balance sheet; Assets, Liabilities, and Equity. We’ll break them apart but first here’s a statement about a balance sheet in general.

    A balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by owners, investors and/or shareholders. In other words, the balance sheet shows a shop owner(s) the shop’s net worth.

    Now let’s talk about assets.

    Within the assets segments, accounts are typically listed from top to bottom in the order they convert into cash. The term for that is liquidity. Assets are separated into current assets (converted into cash in one year or less) and non-current or long-term assets (cannot convert into cash within 12 months).

    In general, this is the order that current assets are listed on your balance sheet:

    Cash and cash equivalents

    The most liquid and can include

    Hard currency

    Treasury bills

    Short term certificates of deposit

    Marketable securities

    Equity and debt securities for which there is a liquid market

    Accounts receivable

    Money that customers owe the shop

    Consider subtracting a percentage of customers who can be expected        not to pay

    Inventory

    Goods available for sale

    Value these at a lower cost or market price

    Prepaid expenses

    The value that has already been paid for:

    Insurance
    Advertising/marketing contracts
    Rent/Mortgage

    Long-term assets are listed in any order and they include:

    Long-term investments

    Securities that will not or cannot be liquidated in the next year

    Fixed assets

    Land
    Machinery
    Equipment
    Buildings
    Other durable, capital-intensive assets

    From the plus side of the sheet, assets, now let’s move into the minus side or liabilities.

    Liabilities are the money that a shop owes to outside parties, to include invoices to suppliers and/or vendors to rent/mortgage, utilities and salaries. As with assets, these are separated into current liabilities (due within one year,listed in order of their due date) and long-term liabilities (due after one year).

    Current liabilities may include the following:

    Current portion of long-term debt

    Bank loans

    Interest payable

    Wages payable

    Customer prepayments

    Earned and unearned premiums

    Within the insurance category; talk to your bookkeeper or insurance         agent

    Accounts payable

    Long-term liabilities may include the following:

    Long-term debt

    Example: interest and principles on bonds issued

    Pension fund liability

    The contributions the shop pays into employees’ retirement accounts       like a 401K

    Deferred tax liability

    Taxes that the shop owes but will not pay for another year
    See you tax professional for an explanation

    The final category, equity, known as owners’ equity or shareholder’s equity, depending upon the size and structure of the shop ownership. This is also called “net assets,” which is calculated by subtracting liabilities (debt owed to non-shareholders) from total assets.

    A sub category to equity is retained earnings. These are earnings retained by the shop owners and is not paid to investors in the form of dividends.

    Retained earnings are used to pay down debt or invest in the shop for expansion or to take advantage of growth opportunities such as new or upgraded equipment or expanding the footprint of the shop.

    Balance sheets have some limitations. This snapshot contains valuable information is it static and represents one moment. When combined with the other financial reports, the income statement and the statement of cash flows shows you the complete picture of your shops financial health.

    If you have any questions or concerns about your balance sheet, sit down with your bookkeeper and she will be able to pull back the covers until you have total understanding of what the balance sheet means to your shop.

    Natalie Paris
    Three Rivers Bookkeeping
    Tel: 907-331-0208
    Email: [email protected]

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