balance sheet is a snapshot of a business’ financial condition at a
specific moment in time, usually at the close of an accounting period. A
balance sheet comprises assets, liabilities, and owners’ or
stockholders’ equity. Assets and liabilities are divided into short- and
long-term obligations including cash accounts such as checking, money
market, or government securities. At any given time, assets must equal
liabilities plus owners’ equity. An asset is anything the business owns
that has monetary value. Liabilities are the claims of creditors against
the assets of the business.
is a balance sheet used for?
balance sheet helps a small business owner quickly get a handle on the
financial strength and capabilities of the business. Is the business in
a position to expand? Can the business easily handle the normal
financial ebbs and flows of revenues and expenses? Or should the
business take immediate steps to bolster cash reserves?
Balance sheets can identify and analyze trends, particularly in the area
of receivables and payables. Is the receivables cycle lengthening? Can
receivables be collected more aggressively? Is some debt uncollectible?
Has the business been slowing down payables to forestall an inevitable
Balance sheets, along with income statements, are the most basic
elements in providing financial reporting to potential lenders such as
banks, investors, and vendors who are considering how much credit to
grant the firm.
Assets are subdivided into current and long-term assets to reflect the
ease of liquidating each asset. Cash, for obvious reasons, is considered
the most liquid of all assets. Long-term assets, such as real estate or
machinery, are less likely to sell overnight or have the capability of
being quickly converted into a current asset such as cash.
2. Current assets
Current assets are any assets that can be easily converted into cash
within one calendar year. Examples of current assets would be checking
or money market accounts, accounts receivable, and notes receivable that
are due within one year’s time.
Cash: Money available immediately, such as in
checking accounts, is the most liquid of all short-term assets.
Accounts receivables: This is money owed to the
business for purchases made by customers, suppliers, and other
Notes receivables: Notes receivables that are due
within one year are current assets. Notes that cannot be collected
on within one year should be considered long-term assets.
3. Fixed assets
Fixed assets include land, buildings, machinery, and vehicles that are
used in connection with the business.
Land: Land is considered a fixed asset but, unlike
other fixed assets, is not depreciated, because land is considered
an asset that never wears out.
Buildings are categorized as fixed assets and are
depreciated over time.
Office equipment: This includes office equipment such
as copiers, fax machines, printers, and computers used in your
Machinery: This figure represents machines and
equipment used in your plant to produce your product. Examples of
machinery might include lathes, conveyor belts, or a printing press.
Vehicles: This would include any vehicles used in
Total fixed assets: This is the total dollar value of
all fixed assets in your business, less any accumulated
4. Total assets
This figure represents the total dollar value of both the short-term and
long-term assets of your business.
5. Liabilities and owners’ equity
This includes all debts and obligations owed by the business to outside
creditors, vendors, or banks that are payable within one year, plus the
owners’ equity. Often, this side of the balance sheet is simply referred
to as “Liabilities.”
Accounts payable: This is comprised of all short-term
obligations owed by your business to creditors, suppliers, and other
vendors. Accounts payable can include supplies and materials
acquired on credit.
Notes payable: This represents money owed on a
short-term collection cycle of one year or less. It may include bank
notes, mortgage obligations, or vehicle payments.
Accrued payroll and withholding: This includes any
earned wages or withholdings that are owed to or for employees but
have not yet been paid.
Total current liabilities: This is the sum total of
all current liabilities owed to creditors that must be paid within a
one-year time frame.
Long-term liabilities: These are any debts or
obligations owed by the business that are due more than one year out
from the current date.
Mortgage note payable: This is the balance of a
mortgage that extends out beyond the current year. For example, you
may have paid off three years of a fifteen-year mortgage note, of
which the remaining eleven years, not counting the current year, are
Owners’ equity: Sometimes this is referred to as
stockholders’ equity. Owners’ equity is made up of the initial
investment in the business as well as any retained earnings that are
reinvested in the business.
Common stock: This is stock issued as part of the
initial or later-stage investment in the business.
Retained earnings: These are earnings reinvested in
the business after the deduction of any distributions to
shareholders, such as dividend payments.
6. Total liabilities and owners’ equity
This comprises all debts and monies that are owed to outside creditors,
vendors, or banks and the remaining monies that are owed to
shareholders, including retained earnings reinvested in the business.