The balance sheet is a statement of an organization's financial condition on a given date. It is a crucial tool for you and others to understand the value of your company and the state of its financial health. You may need it to obtain a business loan, to inform investors how the company is performing, or to provide yourself with a summary of the financial health of your company.
The balance sheet is broken down into three sections where the assets equal the liabilities plus the capital.
- Assets - what the company owns
- Liabilities - what the company owes
- Capital or Equity- the owner's accumulated assets invested or available for investment
According to the Small Business Administration (SBA), highlights of each section include the following:
Current assets can be liquidated within a short period of time, and include: cash, accounts receivable, inventory, notes receivable, prepaid expenses, and miscellaneous current assets, says the SBA.
- Cash is obviously the most liquid of these items. It includes all funds contained in checking, saving, and money market accounts.
- Accounts receivable are payments due from clients. Generally, the receivable exists from the time the client is billed to the time the company receives payment from the client.
- Inventory is the items that a company sells. This line item is generally not applicable to law firms.
- Notes receivable is amounts due to the company arising out of a loan made by the company.
Fixed assets are items that are physical assets that the owner views as long term. These can include land, buildings, or equipment. Other assets are generally of the intangible variety, such as intellectual property or goodwill. These may be more difficult to value, and are often not included.
All of the assets are added up, and the sum equals the total assets, and represents all of the assets owned or payable to the business.
Liabilities are financial obligations or the amounts that the company owes to creditors. They are broken down into current and long-term liabilities, says the SBA.
Current liabilities must be paid within the year and include: accounts payable, accrued expenses, notes payable, and interest payable.
- Accounts payable are amounts due to creditors for services or goods that have not yet been paid.
- Accrued expenses are obligations have accrued but are not yet due, and include wages and payroll taxes.
- Notes payable are amounts due to lenders within the year.
- Interest payable is the current amount of interest due on a long-term loan.
Long-term debts are ones that will not be payable within the current year.
Total liabilities are the amount of the current and non-current liabilities added together, and represents the total amount that the company owes to third parties and creditors.
The capital represents the total assets minus the total liabilities. If the amount is negative, the company is losing money. If the amount is positive, it reflects the amount that the owner has in assets available for use in the business or for investment.
For an example, see FindLaw’s Sample Business Balance Sheet.