One of the important statements in financial statement analysis is the balance sheet. The balance sheet shows your assets, what you own; your liabilities, what you owe; and your owner’s equity, yours and other investor’s investment in the small business firm. Below is a line by line discussion of the items on a sample balance sheet, which can be found at the end of the article.
Line 1 is the firm’s cash account. Small business firms must keep some cash on hand for day-to-day transactions. Business firms also need to keep cash on hand for emergencies and to take advantage of any bargains they might find in the marketplace.
Line 2, accounts receivable, represents what your credit customers owe you if your firm extends credit. Since the balance sheet is like a snapshot of a firm’s financial position at one point in time, the figure for accounts receivable and all the other accounts is accurate for the day on which this financial statement was developed.
The value of the firm’s inventory is stated on Line 3. Inventory is simply the products the firm has for sale. It can be valued using a number of different methods. Two commonly-used methods are called LIFO and FIFO.
The last asset on the sample balance sheet is fixed assets. This asset is stated on Line 4. Fixed assets include any equipment and vehicles you own and any land and buildings you own. Fixed assets normally refer to the large and highly valued assets that are owned by your business firm and those that can be depreciated over time.
The value of the asset accounts is totaled and stated on Line 5. Total assets are the value of everything your firm owns. In this example, that amount is $820,000.
Liabilities and Equity
Liabilities are the debt your firm owes to its creditors. Line 6 lists accounts payable. Accounts payable are the short-term credit accounts that you owe your suppliers. Line 7 shows any long-term bank loans or loans from other sources that you’ve taken out with a maturity of more than a year. You may have had to use long-term loans in order to keep your firm solvent.
Line 8 shows the amount of owner’s capital that has been invested in the firm. This is the money that the owner and any other investors have put in the firm.
The last line, line 9, totals the amount of liabilities and equity. This is the total amount the firm owes plus the owners’ investment in the firm. The total of the liabilities and equity must equal total assets as the firm can’t own more than it owes.
|XYZ Company Balance Sheet|
|Liabilities and Equity|
|6.Accts Payable||$ 180,000|
|7.LT Bank Loans||240,000|
|9.Total Liab & Equity||820,000|