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What Is a Balance Sheet?

November 13, 2021
By James Gussie

A balance sheet is a financial statement that displays the assets, liabilities, and net worth of an organization. It shows how much money has entered or left the company during a specific time period. Balance sheets are usually used to measure performance over long periods of time in order for businesses to understand their previous success.

The “balance sheet example” is a financial statement that shows the assets, liabilities, and owner’s equity of a company. The balance sheet is used to measure the worth of an asset or liability.

This post is part of our Business Startup Guide, a selected collection of our articles that will help you get up and running quickly!

You’ve probably heard the term “balance sheet” used or seen one in a sample business plan document if you’re starting a company or creating a business plan document.

The balance sheet is one of three key components that make up a business’s financial statements: cash flow, balance sheet, and income statement.

A balance sheet’s concept is simple: it displays your company’s assets, liabilities, and owner’s equity at a given moment in time. A balance sheet, in simple terms, displays what a business has (assets), what it owes (liabilities), and how much its owners and shareholders have invested (equity).

The term comes from the fact that a balance sheet must always balance. Liabilities plus owner’s equity are on one side of the equation, while assets are on the other.

Liabilities + Equity Equals Assets

This is really basic sense if you think about it a bit more. Companies must either borrow money (liabilities) or acquire money from owners and investors to pay for all they possess (assets) (equity).

Balance sheets may give you a company’s net value in addition to telling you what it owns and what it owes.

Trevor Betenson, our CFO at Palo Alto Software (the creators of Bplans), provides the following advice on evaluating your balance sheet: “You may calculate your company’s net worth at any moment by subtracting liabilities from assets.”

Assets – Liabilities = Net Worth

Let’s take a closer look at the information that should be included in a balance sheet now that we’ve covered the basics. Download our free Balance Sheet Template if you’re just starting started.

Table of Contents

I’ll go through the following topics in this article:

The elements that make up a balance sheet
A balance sheet’s significance in a company strategy
Examples of balance sheets

In LivePlan, there is a balance sheet.

A balance sheet is broken down line by line as follows:

Businesses will have assets and liabilities that vary from one another. Certain line items and their names may differ significantly from one company to the next, but the calculation stays the same: your company’s assets must equal its liabilities plus equity.

Assets

On a balance sheet, assets are usually arranged from top to bottom based on their ease of conversion into cash. This is referred to as “liquidity.” The assets that are the most “liquid” are at the top of the list, while those that are the least liquid are at the bottom.

Cash:

Cash refers to the money you presently have on hand in the context of a balance sheet. The word “cash” in business planning refers to the company’s bank or checking account balance, often known as “cash and cash equivalents” or “CCE.”

A cash equivalent, such as a money market account or a treasury bill, is a liquid asset that may be changed to cash instantly.

Receivables (accounts receivable):

Accounts receivable are funds that are owed to you but that you have not yet received (thus the term “receivables”).

This money is usually from credit sales, such as business to business (or “B2B”) transactions, when your company has billed a client but has not yet received payment.

Inventory:

The worth of all completed products and ready materials that your company has on hand but hasn’t sold yet is included in inventory.

Assets currently in use:

Current assets are ones that can be turned into cash in less than a year. Current assets include cash, accounts receivable, and inventory, and the sum of these items is often referred to as “total current assets” on a balance sheet.

Long-term investments:

Long-term assets are also known as “fixed assets,” because they consist of items with a long-term worth, such as land or equipment. Long-term investments are difficult to turn into cash fast.

Depreciation that has accumulated:

Depreciation accumulates over time, lowering the value of assets. For example, if a company buys a vehicle, the automobile’s worth will depreciate over time.

Assets held for the long term:

On a balance sheet, the phrase total long-term assets is occasionally used to represent long-term assets plus depreciation.

Liabilities

Liabilities, like assets, are arranged in order of how soon a company must pay them off. In most cases, current obligations are due within a year. After one year, long-term obligations are payable at any time.

Payments to be made:

Accounts payable is the money owed by your company, and it’s the inverse of “accounts receivable.” Your accounts payable number is made up of the invoices that your company is required to pay on a regular basis.

Keep an eye on if this amount is too large, particularly if your company lacks the resources to pay it.

Taxes must be paid:

This only applies to companies who do not pay sales tax immediately, such as a company that pays sales tax quarterly. That may not be your line of business, so if it doesn’t apply to you, don’t bother.

Debt that is due soon:

This refers to any debt that must be repaid within a year, such as short-term loans. On a balance sheet, this is referred to as a line item called current liabilities or short-term loans. Interest costs should be reported in the income statement, not here or anywhere else on the balance sheet.

Total current obligations are as follows:

When the aforementioned figures are put together, they are referred to as a company’s current obligations, which are those that must be paid within a year.

Debt that will last a long time:

These are financial commitments that require more than a year to repay. This is often a large sum that does not include interest. This figure, for example, represents long-term debts for items like buildings or costly machinery. It should be lowering over time as the company makes payments and the loan’s principle is reduced.

Liabilities total:

Everything mentioned above that you must pay out or return has been collated.

Equity

Capital that has been paid in:

Money put into the business as a kind of investment. This is not to be confused with the stock’s par value or market value. This is the amount of money that owners have put into the business as equity investments.

Earnings retained:

Earnings (or losses) that have been re-invested in the business rather being distributed to shareholders as dividends. The business has accumulated losses when retained earnings are negative. The term “shareholder’s equity” is also used to describe this.

This isn’t true for all company legal structures; if you’re a pass-through tax organization, all earnings and losses will be passed on to the owners, and your balance sheet should reflect that.

Earnings net:

This is a crucial statistic since the greater it is, the more lucrative your business is. This line item is also known as profit or income. The metaphorical “bottom line” is revenues minus costs of sales and expenditures.

The whole value of the owner’s equity is:

Equity, often known as capital, refers to a company’s ownership. The difference between assets and liabilities may be used to determine equity. This is also known as “stockholder’s equity” or “shareholder’s equity.”

Liabilities and equity combined:

Assets = liabilities Plus equity is the last equation I stated at the start of this article.

A balance sheet’s significance in a company strategy

A balance sheet is an important component of your financials in your company strategy. The income statement, cash flow statement, and balance sheet are three elements of company financials that are very essential.

These statements provide anybody looking at the statistics with a clear picture of the financial health of the company. The balance sheet, in particular, is used to determine whether or not you are in debt, as well as the value of your assets. This data is essential for running your company and creating a business strategy.

Examples of balance sheets

Large companies will have longer and more complicated balance sheets, with separate balance sheets for various divisions or departments. A balance statement for a small company will be more simple and include fewer line items.

Here’s an example of a balance sheet from Apple. You’ll see that it has a complicated stockholder’s equity part as well as many kinds of long-term assets and liabilities that are listed.

The balance sheet of Apple.

You’ll also note that it reads “Period Ending” at the top, which means that these figures represent the time period up to the date stated at the top of the column. When reporting current numbers rather of making a financial prediction for the future, this phrase is utilized.

A financial sheet from a LivePlan example business plan (also shown above). LivePlan is a business plan authoring program that is cloud-based and includes a company dashboard.

The following is an example of a balance sheet for a small business:

In LivePlan, there is a balance sheet.

As you can see, the balance sheet is referred to as a “projected” balance sheet, indicating that the figures are projections of future values used for business planning reasons rather than a record of actual values. There are also fewer line items and the overall layout is simpler.

Check out these sites for additional information on small company finances:

Do you have any other concerns regarding balance sheets? Let us know @Bplans on Twitter!

A balance sheet is a financial statement that shows the assets, liabilities, and equity of a company. It also includes an income statement and cash flow statement. The “balance sheet questions” are questions that people ask when they first learn about this type of document.

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Frequently Asked Questions

What is balance sheet in simple words?

A: A balance sheet is a list of all the assets and liabilities that are being held by an individual or company.

What is a balance sheet used for?

A: A balance sheet is a financial statement that shows the companys assets, liabilities and owners equity as of a specific date. The value on the left side must be equal to or greater than the value on the right side.

How do you explain balance sheet?

A: A balance sheet is a record of the assets, liabilities and owners equity at a specific point in time. It provides information about an organizations financial condition.