Small Business Accounting 101: Understanding the Balance Sheet

Understanding your cash flow, profit, and loss statement would tell you some things about your business. However, many small business owners tend to overlook a crucial measure that indicates a more in-depth view of their business’ overall health. This is called the balance sheet, and it’s one of the most vital financial statements since it shows a clear picture of a business’ finances.

What Exactly is a Balance Sheet?

A balance sheet is also known as a “state of financial position” because it allows business owners to know exactly what it currently owes and what it owns. Put simply, it details the liabilities, assets, and equity of any business at a particular point in time. As renowned accountants in Utah adds, it helps business owners determine their business’ financial ability and strength.

Neglecting to understand your balance sheet and failing to resolve issues that it revealed might result in daunting challenges for your small business. Likewise, as your balance sheet is more detailed than your cash flow or profit and loss statement, it uncovers plenty of the crucial of decisions that could affect your business’ overall financial health. These include incurred expenses, pricing and product issues, and sales and marketing performance.

What are the Three Sections of a Balance Sheet?

Your balance sheet has three sections — your liabilities, assets, and equity.

Liabilities detail what your business currently owes or would owe in the future, assets are what your business owns, and equity is the net worth of the owner. These numbers could be either negative or positive. If they’re negative, you should take the necessary steps to improve them as early as possible.

Generally speaking, your business assets should be higher than your liabilities so that your equity would be positive. This means that you don’t ever want to see the liabilities section of your balance sheet increasing faster than your assets.

Your business’ balance sheet is an extremely powerful tool that could tell many things about the health of your business’ finances. It’s comprehensive and offers a clearer snapshot of your business’ overall health. Ultimately, your balance sheet shows the exact worth of your business, so make certain that whoever does the calculations does it properly.