Understanding Balance Sheet Report
There are cornerstone accounting books, and the balance sheet is one of the three, others are the cash-flow statement and the income statement. In simple terms, the balance sheet is better known as the “statement of financial position.” As a business owner or shareholder, you may find it difficult understanding the balance sheet, don’t be bothered you are not alone as this article will educate you. In your balance sheet, you will find assets, liabilities, and equities. These three are related and forms the backbone of the balance sheet. The almighty formula of the balance sheet is expressed below;
ASSETS = LIABILITIES + EQUITY
- What Stands as Assets?
Assets are used in running the business. They are every property owned by your company. Assets are often sub-divided into two, current assets and fixed assets. Current assets are convertible to liquid cash within a financial year, while fixed assets are properties that take longer than a year to convert to cash.
Look into your balance sheet; you should see items such as equipment, machinery, cars, or something that last beyond a year, these are fixed assets. The other type of asset is represented by items such as cash, cash equivalent, and account receivable. Your inventory, work-in-progress and raw materials are also current assets.
- And What are Liabilities?
In your liabilities section, you’ll see unpaid taxes, salaries, money owed to vendors and other unpaid day-to-day bills. In the liabilities section is also your unpaid loans, mortgage, and other payables.
Other liabilities may include interest on these loans, the principal value and interest accrued. Items in the liabilities section are itemized using a cloud accounting software.
- Lastly, The Equity
The items that will be displayed on your free bookkeeping software for this section will vary based on the business you are operating. As a sole proprietorship, you will have owners equity and a draw account. Let’s assume it’s a partnership, look out for an account for each partner which the total must be the original cost of set-up. For a corporation, a common stock that will tally with the value quoted in the Articles of association will be marked out.
In most balance sheet drawn up by online accounting software, you will find the assets at the top, followed by the liabilities and the equity.
Analyzing The Balance Sheet With Ratios
myBooks Online accounting software makes it easy to understand your balance sheet. Financial ratio analysis is the dominant technique used in drawing out inference from the balance sheet. Financial ratio analysis as computed by an online accounting software for small businesses, a knowledge of the financial standing of the company can be derived.
Through a cloud accounting software, the current financial condition of the business in synergy with the other two cornerstone books can be pictured by anyone even without accounting knowledge.
Drawing out a balance sheet is purposeful for investors and business owners to understand the profitability of the business. This is known through what the business owns and owes.