Understanding your balance sheet is critical to your business’s financial wellbeing.  You’ll see what your cash balance is, your cash flow, accounts receivable and payable positions, the nature of your debt, inventory position, and assets in relation to your liabilities.  To understand your balance sheet, you need to know the equation Assets = Liabilities + Owner’s Equity.  This needs to be in play if the balance sheet is going to balance.



To make things simpler, I’ve put together the basic structure of the balance sheet with assets, liabilities, and equity.  We start off of with current assets or assets that will become liquid in one year:

• Cash
• Accounts Receivable 
• Prepaid Expenses 
• Inventory 

Next, you will see your fixed assets or assets that have a useful life of longer than one year:

• Vehicles
• Equipment and Machinery 
• Furniture and Fixtures
• Accumulated Depreciation 

Then, we have intangible assets or assets that have no physical substance:

• Goodwill
• Trademarks and Patents
• Accumulated Amortization 

After assets, we have to go through our liabilities.  We’ll start off with our current liabilities or liabilities that will mature in one year: 

• Accounts Payable
• Credit Cards
• Line of Credit
• Deposits from customers
• Sales Tax Payable 
• Payroll Tax Payable
• Wages Payable
• Accrued Expenses 

Next, our long term liabilities or liabilities that will mature beyond one year:

• Term Debt (Car loans or Equipment loans)

Finally, we have equity like:

• Common Stock
• Paid in Capital 
• Owner’s Draw
• Retained Earnings

Overall, understanding your balance sheet puts your business in the best possible position for success.