The Balance Sheet
The balance sheet is a financial snapshot of what your business owns (its'
assets) and what it owes (its' liabilities) at a particular point in time e.g. year end.
The difference between the assets and liabilities represents the owner’s equity or
financial investment in the company. This is the basic accounting equation used
in the preparation of the balance sheet.
Assets = Liabilities + Owner’s Equity
The format of the balance sheet is standardized with assets on the left and
liabilities and owner’s equity on the right so that when it is prepared properly, it is
"balanced". In other words, the total worth of your business, which is determined
by your asset total, is equivalent to the money you or your shareholders have
directly invested (equity) plus the amount of money that has been borrowed to
put into the business (liabilities).
The balance sheet provides a wealth of information useful to business owners,
managers, creditors, prospective investors, tax departments and the general
public in some instances. From the balance sheet you can determine:
• The solvency or insolvency of the company in the short term.
• Future financial commitments.
• Owner’s and shareholder’s investment in the company.
• Changes or trends in the company’s financial condition if compared over
• Extent of creditor involvement in the company.
Here is how a typical balance sheet would be set up:
TOTAL ASSETS ………………$_______
TOTAL LIABILITIES…………. $______
Balance at beginning of year
Income for the year
Less owner’s drawings
Total Owner’s Equity
TOTAL LIABILITIES & OWNER’S
These are any items, which could be converted into cash in the normal course of
business within one year. Examples are cash, receivables, supplies, prepaid
expenses, etc. These