The balance sheet is a snapshot of your business financials at a given point in time. Unlike an income statement, which covers a period of time, a balance sheet represents one date in time. Managing your balance sheet is important in tracking the growth of your business.
When you’re looking to grow your business, an updated balance sheet will help you compare two different points in time to see changes in your retained earnings, accounts receivable, accounts payable, inventory, cash, and equity.
Analyzing how your balance sheet changes over time will reveal important financial information and give you the insight you need to help you sustain and grow your business.
Balance sheet equation
Assets = liabilities + net worth (owner’s equity)
Assets represent all items of cash and property that are owned or due to your business. Assets on the balance sheet are divided into two categories: current assets and noncurrent assets. Examples of current assets are cash and inventory. Examples of noncurrent assets include property, equipment, and furniture.
Liabilities represent your business obligations to creditors and are divided into two categories: current liabilities and noncurrent liabilities. Current liabilities are amounts due to be paid within 12 months; examples include accounts payable, sales taxes payable, and accrued expenses. Noncurrent liabilities include financial obligations that are long term, not due within the present accounting year. Noncurrent liabilities include long term lease obligations, long term bank loans, and deferred revenues.
Net worth or owner’s equity represents your investment in the business, including money you have invested and income you kept (reinvested) in the business from profits. The balance sheet is one of the main financial statements you will use to assess your business performance. The figures on your balance sheet relate to and are affected by your profit & loss statement, another key financial statement for your business.