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Accounting Basics

Just what IS a balance sheet?

Balance sheet

Great question! The short answer is, a balance sheet is a document where you track all that you own and all that you owe.

The answer you really need to understand is a bit more in-depth than that so let me explain.

Every balance sheet has three parts:

  • Assets- Anything the business owns that would provide current or future economic benefit. This could include everything from equipment to your website to accounts receivable.

  • Liabilities-Amounts that you owe and other financial obligations. This would include everything from accounts payable (your bills) to any loans you have outstanding.

  • Owner Equity-How much each owner has invested in the company as well as the amount left over from previous years, which is called retained earnings.

Understanding the formula

It might seem that these three components are unrelated collections of data, but they are actually all part of the same formula that tells you if your books are in balance or not. Now don't freak out over formulas. I'm going to explain this one in words.

Assets (What you own) minus Liabilities (What you owe) equals Owner's Equity. You can kind of think of it like the equity you have in your house. What your house is worth minus your mortgage equals your equity. You can write this formula as A - L = OE, but accountants write it as A = L+OE.

Traditionally, assets are shown on the left side of the balance sheet and liabilities plus equity is on the right side. You always want your left and right sides to match! That is why it’s called a balance sheet.

I know all of this sounds complicated and for the average person, it probably is. That’s why accountants must have the training to understand these documents, so they are accurate and an appropriate information tool.

The big picture

That’s great information, Wendy, but what does it all tell me? The short answer to your question is that your balance sheet tells you the big picture of your finances.The balance sheet essentially summarizes everything into a snapshot look including:

  • How much cash you have on hand

  • How much cash is expected to come in (accounts receivable)

  • How much you paid for any equipment

  • How much overall debt you owe

  • Amount invested by each owner (either cash or stock).

Are you a Northwest Arkansas business that needs help producing and understanding your reports? Don’t try it alone, that’s why I’m here. I’d love to help you grow your business.