The Anatomy of a Balance Sheet: A Simple Guide

What is a Balance Sheet?

A balance sheet is like a photograph of your finances. It's a snapshot that shows what assets your company controls and who owns them. You MUST give a shit about this statement, because it'll help you understand things like: Is my company on it's way to going bankrupt? How much can we invest in a new line of business?

The balance sheet is a complex demonstration of the basic accounting equation:

Assets = Liabilities + Owner’s Equity

The balance sheet will let you know exactly what assets (things of value) and who owns those assets: someone else (liabilities) or the business owner (owner’s equity). 

Here's a few things to note about the balance sheet: The balance sheet is separated with assets on one side and liabilities and owner’s equity on the other. It is so named because the two sides of the balance sheet ALWAYS balance. In other words, both sides add up to the same amount. 

 

What the fuck are Assets?

An asset is anything of value that your business controls. Here are some examples of assets: Cash, office equipment (computers, chairs, machines, car, etc.) and inventory. Accounts receivable are also assets, this number represents money that is owed to you by customers or clients who haven't yet paid you.

The thing about assets is the financial ownership doesn’t matter. Here's a good rule: if something is in possession of a company, it is considered an asset.

Did you buy a new computer for work? It's an asset. Did you buy a bicycle to make deliveries? It's an asset. Did you buy a new screen printing machine to make prints to sell? It's an asset. 

And what about Liabilities?

Liabilities are debts you owe to other people. Some examples of common liabilities are credit card balances that are due, an outstanding payment owed to vendor or a long-term small business loan.

If you have to pay debts in the future or have any future financial obligations, these debts are also listed in the liabilities section.

What the heck is Owner’s Equity?

Owner's equity is the difference between what your company owns as assets and owes as liabilities. In other words, it's the portion of the business assets that you own free and clear.

It’s important to note and that owner’s equity is not necessarily how much the business is worth if it were to be sold. This is because businesses are usually valued based on a multiple of it's earnings.

So to recap... 

 

 

  • The balance sheet is a complex demonstration of the basic accounting equation: ASSETS = LIABILITIES + OWNER’S EQUITY.
  • The balance sheet will let you know exactly what assets (things of value) and who owns those assets: someone else (liabilities) or the business owner (owner’s equity). 
  • The two sides of the balance sheet ALWAYS balance. In other words, both sides add up to the same amount. 

 

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