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WARNING: Here’s What Every Shop Owner Needs To Know About Their Balance Sheet
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/MortgageLong-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 assetsFrom 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 explanationThe 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.
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