The balance sheet allows a business to stop in time and take a snapshot of the company's net worth. Like most financial statements it is usually completed within a few days after the end of the month to show the net worth for the previous month. Net worth and owner’s equity are synonymous. Owner’s equity can refer to a sole proprietor, partnership or stockholder equity.
Understanding the Balance Sheet
The balance sheet is divided into two sections and each section must balance. The first section shows the business assets, the second section shows the liabilities and owner’s equity. The following formula is a simplistic example of what makes up the balance sheet.
Assets – Liabilities = Owner’s Equity
To understand the concept let’s show how this formula works on an individual level. If an individual owns a car (asset) worth $20,000 and the remaining balance on the car loan (liability) is $8,000, the owner’s equity in the car is $12,000. If this example were put on a balance sheet it would read like:
- Asset $20,000
- Liability $8,000
- Owner’s Equity $12,000
From the General Ledger to the Balance Sheet
The balance sheet is an accumulation of the general ledger (GL) accounts that affect owner’s equity or net worth. The general ledger accounts that affect owner’s equity is generally asset and liability GL accounts. The balance sheet is a financial statement that can have a left side for assets and right side for liabilities and owner’s equity. Of course the two sides must balance each other. It can also be stated with a top portion (assets) and a bottom portion (liabilities and owner’s equity).
Accounting Balance Sheet Variations
How a balance sheet is set up depends largely on how the general ledger accounts are set up. Even though there are a lot of similarities within businesses of the same industries, there are a lot of variations between one business and another.
Assets may be separated into current and fixed assets. There could be other asset sub-categories like investments, property, equipment, goodwill and prepaid insurance or prepaid expenses.
Liabilities may be separated by current, long-term, notes payable and deferred expenses, just to name a few. Public corporations can have a multitude of sections for owner’s equity like different types of stocks, treasury shares, retained earnings and many other sections.
Small Business Sample Balance Sheet
In this sample let's use a auto parts store that is a sole proprietor. This is a simplistic example.
ABC Auto Parts – Balance Sheet – January 2010
Current Assets
- Cash $5,000
- Accounts Receivable $20,000
- Inventory $150,000
- Supplies $2,000
Fixed Assets
- Equipment $15,000
- Land $10,000
- Building $80,000
Total Assets $282,000
Liabilities
- Accounts Payable $63,000
- Salary Payable $12,000
- Notes Payable $90,000
- Taxes Payable $10,000
Total Liabilities $175,000
Owner’s Equity $107,000
Total Liabilities & Owners Equity $282,000
The balance sheet is an important analytical tool to measure the owner’s net worth. It can also be used to indicate positive and negative trends in assets as well as liabilities. When setting up general ledgers, a certified public accountant (CPA) should be consulted to ensure that owner’s equity is correctly stated on the balance sheet.
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James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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