What do you think of when you hear: Accounting 101 The Balance Sheet as a small business owner? The answer we receive most often is: I need to know where my money is going.
So, let’s use
an extreme analogy; as a small business owner,
your business finances are your blood and your books are your veins; good
bookkeeping keeps your business flowing.
A big part of Accounting 101 is the balance sheet. The balance sheet is the big-picture summary of how your business is doing at a moment in time, usually at the end of a month or year. If you have investors or are seeking a loan, you most likely will need to produce a balance sheet to show them why you and your company are worth their investment.
A balance sheet has three main components: assets (the things you own), liabilities (the things you owe), and equity (the amount you and investors have put in). For any small business owner it's essential Accounting 101 to understand all three of these categories in the balance sheet.
Assets are everyone's favorite part of the business. Many different things can make up your business's assets, but the most common are:
If you go beyond accounting 101, you will learn about the more intangible kinds of assets.
Liabilities are the things your business owes to others, including:
These may seem less exciting than your assets, but once you learn accounting 101 and grasp the balance sheet, you’ll understand that both are equally important.
On a company's balance sheet, equity refers to the amount of the funds contributed by the owners (also known as the stockholders) plus the retained earnings (or losses). This is also referred to as "shareholders' equity".
As you may guess from the name, your balance sheet requires that your assets, liabilities and equity all balance. This means that your assets, totaled up, should be equal to your liabilities plus your equity. In general, this is also true on a smaller scale. You pay cash or acquire an account payable to acquire inventory, so these transactions are equal. You invest a few thousand of your own dollars, increasing cash and increasing your equity at the same time.
That in essence is the crucial principle you need to understand about your balance sheet - assuming that each of your transactions is recorded correctly and transferred correctly to your balance sheet, everything should add up to the penny.
Balance sheets therefore do two things for you as a business owner: they allow you to demonstrate to investors how strong your business is, and they allow you to keep an eye on the big picture and make sure your business is using money wisely.
However, though the balance sheet is a key part of your business's accounting process; it is by no means the only thing you need to know. As a small business owner it is essential that you understand how all these various financial parts of your business comes together to give you the bigger picture of your businesses financial health.
If you need advice on your businesses financial health or are in need of professional bookkeeping services, we would love to talk to you.
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