In Financial Statements Part One, we looked at the financial statement known as the P&L Statement or as some know it the Income Statement. Today We will look at another important financial statement know as the Balance Sheet.
Whether you are a business or an individual, everyone has assets they own, debt that they owe (some fortunate individuals and companies may not have any debt) and have a net worth. The balance sheet keeps track off all of these. Lets look at the first part of the balance sheet which keeps track of your company’s assets.
Assets that your company own are broken down into the following categories: Current, Non Current and Other.
Current assets are items that you can convert to cash within a year. Examples of these are:
Cash – Money in your checking and saving accounts.
Marketable securities – Stocks and bonds and other securities.
Accounts Receivable – money owed to you from customers.
Inventory – items that your company sells.
Pre Paid Expenses – this represents expenses you have paid in advance such as insurance or rent.
Notes receivable – any money owed to your company not related to the sale of goods and services.
Non current assets are those assets that are not converted to cash, consumed or sold in a year such as buildings and equipment. Some examples are:
Fixed Assets – these include buildings your business owns, equipment both in the field and office, furniture, fixtures and vehicles.
Depreciation – this represents a non cash charge the IRS allows business owners to take for wear and tear on assets such as buildings, plant and equipment.
Long Term Investments – this represents monies invested in another company that you do not plan to convert to cash within twelve months.
Intangible Assets – these are non physical assets such as patents, trademarks and goodwill. Goodwill is created if you buy a company for more then what the fair market value of the company is worth.
Other Assets – examples of this would be advances to employees, bond issuance costs and cash surrender values of life insurance companies.
Liabilities are what your company owes to other companies. These can be monies owed tom vendors, bank loans, private lender, etc. Just like assets, they are broken down into current and non current categories.
Current liabilities are obligations payable within your company’s current calendar year. Examples of current liabilities are as follows:
Accounts Payable – these are funds due to your vendors. In most cases they are due in 30 days.
Notes Payable – this usually represents funds due to a bank or other lender over 12 months.
Accrued expenses – are expenses that have been incurred but net paid. Some examples of these are interest expense payable and wages payable.
Payroll current liabilities – examples of these are employee and employer portion of payroll taxes withheld, workman’s comp and employee insurance withheld.
Unearned revenue – this represents monies received from a client where you haven’t delivered the product or service.
Non current liabilities are those obligations not due within your company’s current calendar year.
This represents the portion of a bank loan or other loan payable that is not due within your company’s current calendar year. As stated above any amount due within your company’s calendar year is listed under notes payable of your company’s current liabilities.
Net worth is what your company is worth. To calculate your company’s net worth you subtract your company’s total debt (current liabilities + non current liabilities) from your company’s total assets (current assets + non current assets + other assets). The remaining amount is called net worth. However, just like assets and liabilities, your company’s net worth is broken down into different categories.
Examples of Net Worth Categories
Common Stock – represents shares of ownership in your company.
Preferred Stock – represents shares of ownership that have precedence over common stock owners.
Owners Investment – represents funds that an owner or owners have invested in the company.
Retained earnings – this account represents profits the company earns that are left in the company and not taken out as distributions. Retained earnings will reduce if your company has a loss for the year.
In the two blogs Financial Statements Part One and Part Two we discussed two pivotal financial statements for every business owner; the profit and loss statement and the balance sheet. These two statements contain pivotal data every business owner needs to assess how his or her company is doing. If you have any questions regarding these two blogs please email me at firstname.lastname@example.org. In the next blog, we will take a look at how to use the information in these two financial statements to provide further relevant information for you in running your company.