A balance sheet summarizes a company’s assets, liabilities and equity at a specific point in time. Think of it as a snapshot of what your business is worth on a specific date.
A balance sheet is organized into 3 main sections:
- Assets (what your business OWNS)
- Liabilities (what your business OWES)
- Equity (assets – liabilities)
Assets
Assets are typically broken up into current and long-term assets (or non current assets).
Current assets include anything that you plan to turn into cash within 12 months. Examples of current assets include inventory, money in bank account, accounts receivable, prepaid expenses, and short term investments.
Non-current assets are items that won’t be converted into cash within 12 months. Examples include machinery, buildings and land, intangible items like patents and trademarks, and long term investments.
Liabilities
Liabilities are also broken up into current and long-term liabilities (or non current liabilities).
Current liabilities are financial obligations that are due within 12 months. Examples include wages, accounts payable to suppliers, credit card statements, and HST/payroll taxes.
Non-current liabilities are obligations on the business to pay beyond 12 months. Examples include loans that don’t have to be repaid within a year or bonds payable.
Equity
Equity is the difference between assets and liabilities or in other words the money your business currently has. It is also referred to as “owner’s equity” or “shareholders equity” depending on the legal structure of your business. Examples of equity include stock or capital (money owners invested in the business).
The assets must always equal the liabilities plus equity. This makes sense as assets are purchased by either borrowing money (liability) or by using the money from the owners (equity). This is why it’s called a balance sheet, as both sides must balance.
Assets = Liabilities + Equity
The balance sheet report (like any financial report) is only as good as the data that feeds it. This is why it’s important that as your bookkeepers, we capture all your assets and liabilities. The more complete data we have means the more accurate your reports will be.
Insightful Financial Connections provides three monthly financial reports (Balance Sheet, Profit & Loss, and HST Summary) to all our bookkeeping clients. If you have any questions about your report, please contact us and we would be happy to review it with you.