In my previous post, I mentioned the Income Statement and Balance Sheet. Today, I thought it might be a good idea to expand on the Balance Sheet.
As stated previously, the Balance Sheet is a summary of things you OWN and amounts you OWE. The things you own are called Assets while the amounts you owe are recorded as Liabilities. There is another group on the balance sheet called Equity. This third group is sort of optional as it only applies if there is a need/desire to record the equity one or more people have in the company.
Some of the more common assets include:
- Cash
- Inventory
- Accounts Receivable
- Property
- Supplies
Liabilities, on the other hand, are amounts owed. This would include any debts in the name of the business, typically loans and/or accounts payable. When you buy something today that you will pay for later, that would be considered accounts payable.
Also, if you are prepaid for services, those would also be considered liabilities until services are rendered. For instance, if a roofing company is paid $2000 before starting to work on a roof, the $2000 would be classified as a liability until the work is performed. It might be easier to grasp the concept if you think about it like this: If the work is never performed, the $2000 would have to be returned. It actually hasn’t been earned yet.
The third classification on the balance sheet is equity. This is intended to represent the owner(s) equity in the company. For large corporations, this represents a substantial part of their capital.
For a sole proprietor, this is usually ignored. However, I recommend maintaining it because it can help you determine if the company is standing on its own or being propped up by your personal investment. One simple way to help manage this is to open separate bank accounts for the business and avoid mixing your business and personal accounts. If you want to use personal money for the business, make a deposit into the business account and record it so that it the business will show it as an increase in the owner’s equity.
As always, feel free to send me a message with any questions you might have.
