Balance Sheet

A balance sheet is a statement of the financial position of a business that lists the assets, liabilities, and owners' equity at a particular point in time. In other words, the balance sheet illustrates a business's net worth.

The balance sheet is one of the three financial statements used to illustrate the financial health of a business. The other two are the income statement and cash flow statement.

A balance sheet helps business stakeholders and analysts evaluate the overall financial position of a company and its ability to pay for its operating needs. You can also use the balance sheet to determine how to meet your financial obligations and the best ways to use credit to finance your operations.

The balance sheet may also have details from previous years so you can do a back-to-back comparison of two consecutive years. This data will help you track your performance and identify ways to build up your finances and see where you need to improve.

🙋‍♀️TIP: it is a good idea to have an accountant to do your first balance sheet, particularly if you do not have experience on this field. A few hundred euros of an accountant time could help you to avoid any potential issue related with legal or tax

How a Balance Sheet Works

All accounts in a general ledger are categorized as an asset, a liability, or equity. The items listed on balance sheets can vary depending on the industry, but in general, the sheet is divided into these three categories.

Assets

Assets are anything valuable that a company owns, whether it’s equipment, land, buildings, or intellectual property. Some common assets types are:

Accounts receivable: any payments that your clients and customers owe you.

Cash: the money you have in your business bank account.

Inventory: any goods you have in stock that you intend to sell.

Property and equipment: any buildings or tools that you need to operate your business.

Liabilities

Liabilities are any debts a company has, whether it’s bank loans, mortgages, unpaid bills, or any other sum of money that the company owe. Some examples are:

Accounts payable: payments you owe your suppliers.

Bank loans: the principal you owe investors

Salaries and wages payable: what you’ve agreed to pay your employees in the future, but haven’t paid out yet.

Equity

Equity (also called net worth) are the contributions made by the partners or shareholders of the company, plus the profits it generates. The assets of a company are classified into:

Capital or share capital: the contributions made by the partners or shareholders of the company.

Retained earnings or reserves: earnings that are retained or accumulated in the company after paying dividends.

Profit for the year: earnings for the year before being distributed as dividends and destined to retained earnings.

What is the relationship between assets, liabilities and equity?

The relationship between the assets, liabilities and equity of a company is that, according to the basic accounting equation, in every company the total value of the asset is equal to the total value of the liability plus the total value of the equity.

Assets = Liabilities + Equity

This is because, in theory, all the assets of a company are financed either with third-party funds (liabilities) or with own funds (equity).

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