Balance Sheet Overview
If you are in the beginning stages of forming your small business, you'll soon learn there are a number of important decisions you will need to make to give your new venture the best possible chance at success. As you wade through the first steps in starting your small business, you'll come across issues such as naming your business, creating a business plan, start-up financing, business licenses and permits, and more. One of the most important accounting-related matters to understand is the balance sheet.
This financial statement provides a snapshot of your business’s financial health. If you are thinking of applying for a business loan or seeking to woo investors, you'll need to show a balance sheet to show the success of your business and prove that your idea is a good risk.
What is a Balance Sheet?
When seeking financing for your small business, your banker or lender may ask you for a balance sheet representing your current financial condition. If you are new to business accounting, it goes something like this. The balance sheet lists your assets and liabilities in one place. An asset is anything that has value, such as equipment, real estate or cash in your bank account. Liabilities are money you owe others, such as payroll, taxes, mortgages and more.
The key is equity. Equity represents the financial difference between your assets and liabilities. Capital or net worth, also known as "shareholder equity," is the money that would be left if a company sold all of its assets and paid off all of its liabilities.
How Significant is a Balance Sheet?
Those who have a stake in your company's financial success will find the balance sheet invaluable because of the many ways to analyze the information it contains. Stakeholders can look at the proportion of current assets, which is a good way to measure a company's liquidity and its ability to handle unexpected expenses or undertake expansion projects.
Sample Business Balance Sheet
The following provides an example of the types of information generally included in a business balance sheet. For more information, visit FindLaw's Small Business Law section.
Accounts receivable $__________
Short-term loans $__________
Prepaid expenses $__________
Long-term loans $__________
Other Assets $__________
TOTAL ASSETS $__________
Accounts payable $__________
Short-term notes payable $__________
Interest payable $__________
Taxes payable $__________
Long-term notes payable $__________
TOTAL LIABILITIES $__________
Capital or Owner's Equity
Retained earnings $__________
TOTAL CAPITAL or OWNER'S EQUITY $__________
(Total Assets will always equal Total Liabilities plus Total Capital)
Learn More by Consulting with a Legal Expert
Keeping a firm grasp on your company's financial health is important to your continued success in the business world. Whether you are a sole proprietor or an LLC, speak to a skilled business and commercial law attorney in your jurisdiction to find out how you can maximize your profits and minimize your losses under the laws in your state.