How to Read a Balance Sheet

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If you’ve ever wondered how your business is doing at a moment in time, you need the company’s balance sheet. The balance sheet shows the combination of your assets, owner’s equity, and liabilities.

You’ll see where your company stands, and it could help you make important business decisions.

Balance Sheet Assets

The first section of your balance sheet is your assets. It’s pretty self-explanatory, but we’ll go over what should be included in this section so you’re clear.

  • Cash – This includes all money in checking and savings accounts as well as any investments that will mature within 3 months. Think liquid funds when you think of your cash balances.
  • Inventory – This is the value of any inventory you have on hand. If you were to liquidate it, how much would it be worth?
  • Accounts receivable – If you’ve billed clients but have yet to get paid, that’s accounts receivable and is an asset.
  • Equipment – If your business has any equipment, the value can be counted toward your assets.

Balance Sheet Liabilities

Liabilities are money you owe to vendors or your loans. There are usually two parts to your liabilities section:

  • Accounts payable – This is money you owe to vendors or suppliers for materials you’ve received.
  • Notes payable – This is money you owe to your loans, such as a mortgage, equipment loan, or any other business financing.

Balance Sheet Owner’s Equity

Owner’s equity is money you have in the business. This is after any debts and includes any stocks you or any other owner has in the company.

Any of the business’s value that remains in the business (you don’t take as a salary), is part of the owner’s equity.

Balancing your Balance Sheet

To balance your balance sheet, you must make sure your liabilities plus owner’s equity equal your assets. If they don’t balance, there was likely an error in your bookkeeping somewhere along the way.

Your balance sheet is also a good way to tell where you stand. If your liabilities are more than your assets, then you are in the red and your business could be in trouble. It’s time to rethink some of your business decisions to see how you can make things work again.

Final Thoughts

Your balance sheet is a great way to tell you how your business is doing at any point in time. It’s a great way to tell what your business is doing right now and what you should do moving forward.

You can use it to tell if your business needs help, if you’re handling it well and growing, or if there’s room for growth that you didn’t realize was an option yet.

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