A business balance sheet is a snapshot of your company’s net worth at a specific point in time. It lists your company’s assets, liabilities and shareholders’ equity.
Assets are grouped into current and noncurrent assets, with the latter categorized as long-term. The balance sheet also shows your company’s outstanding debt and other short-term financial obligations.
Assets
As its name suggests, a balance sheet shows the things you own, as well as what you owe. The items your business owns are called assets and include everything from cash in the bank to inventory, equipment and buildings. The things you owe are called liabilities and include accounts payable, which is money that customers have paid you but which must be paid within one year; taxes you owe; payroll; and the current portion of long-term debt.
Standard balance sheets usually list the items in order of liquidity, or how easily they can be turned into cash or sold. Then they separate current and fixed (also known as non-current) assets. You may also have a section that lists intangible assets like patents and trademarks. After listing all of the assets, subtract the liabilities to arrive at shareholders’ equity, which is a company’s net worth. This is often used as a measure of a company’s success or failure.
Liabilities
Liabilities include all debts owed to businesses and individuals. This includes amounts owed by customers who purchase goods on credit terms, advance payments toward future expenses and debt incurred from borrowing money from banks or investors. Businesses typically sort their liabilities into two categories based on their due dates: current and noncurrent (due within one year and those that aren’t due for more than a year, respectively).
The left side of the balance sheet lists all of a company’s itemized assets, separated by whether they’re long-term or short-term. The right side shows a company’s itemized liabilities and owners’ equity at the end of an accounting period.
The formula for calculating a company’s net worth or owner’s equity is calculated as total assets minus total liabilities and minus all deferred taxes. If the result is positive, that indicates the company’s financial health and could provide an indication of the company’s profitability. If the result is negative, it suggests the company’s assets are being eaten up by its debt and future expenses.
Shareholders’ Equity
The remainder of a company’s assets after subtracting its liabilities is recorded on the business balance sheet under shareholders’ equity. This includes paid-in capital and retained earnings. The former involves the initial investment by stockholders, while the latter records accumulated business profits that haven’t been distributed as dividends to investors.
The total liability section of a business’s balance sheet includes both current and long-term debt obligations. The former involves any amount due within a year (such as accounts payable and taxes payable) while the latter includes any financial commitments that must be paid over a period of more than a year, including bonds payable, leases, and pension payments.
Another item that can appear on a company’s balance sheet is treasury shares, which are stocks that the firm has repurchased from shareholders and is now holding. To calculate shareholders’ equity, all of these components must be included in a formula. This formula is based on a company’s net after-tax earnings and retained earnings, which is derived from its income statement and added to its balance sheet by subtracting dividends.
Cash
A company’s liabilities are its debts to suppliers, creditors and employees. These are recorded in the liabilities section of the balance sheet and can be categorized as either short- or long-term. Long-term debts are those that won’t expire within one year and include bank loans, credit card payments and lease agreements.
Assets are categorized in order of their convertibility into cash, with current assets (that can be turned into cash or cash equivalents in one year) listed first, followed by fixed assets like machinery and equipment. Intangible assets that don’t have a physical existence, such as patents or trademarks are also included.
Liabilities and shareholder’s equity are the other two sections of the balance sheet. These are what balance out the appropriately named document and reflect what would remain if the business liquidated all of its assets and paid off all its debts.