Understanding the Balance Sheet

How often do you look at your balance sheet? Monthly? Once a year? Never? Yeah, I hope you do look at it. The balance sheet can be a great indication of your company’s health and it’s one view of the business’s worth, but it can be confusing for some business owners. So today I’m going to explain it a little bit to you. The basic equation behind the balance sheet is assets equals liabilities, plus equity. But another more intuitive way to look at it is assets minus liabilities, equal equity. Assets meaning what we own. Liabilities what we owe and equity is how much the business is worth. So, assets can be divided up into two different categories current, which means that their likely to be turned into cash in less than a year, and fixed assets, things like equipment, vehicles, furniture and fixtures and building and land if you have it. Liabilities similarly are also divided into two categories. Current again, what’s due in one year? And this includes things like accounts payable, any bills that you owe, any accrued wages, employee taxes, sales taxes, your credit card liability, and any customer deposits you may have. And then the other pieces. Long term liabilities, which is the portions of loans and mortgages that are due in more than a year. The final piece of the balance sheet is equity and this is the owner’s equity. I’m going to talk about this from an LLC perspective because it’s different for a corporation. You will see a few different categories, you’ll see a capital account where you can see what’s been contributed. You’ll see an owner’s draw where you can see what’s been taken out of the business and there may be one of those for each of the owners. You’ll also see a category called retained earnings which is the sum over the whole lifetime of the business of all the profit and loss up until the prior year. And then there’s finally a net profit and loss for this year. Now I get that this is a lot like last time I have a picture for you that you can get right here (https://growth-cast.com/bs2) and next week we’re gonna talk about what ratios are important and interesting to look at on a balance sheet. So make sure to subscribe to my YouTube channel (https://www.youtube.com/c/GrowthcastCash) to get that video for next week. This is Judi Otton with GrowthCast and I’ll see you next time with your next fiscal Fitness Tip of the Week.

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