Balance Sheet Essentials Every Small Business Owner Needs to Know

All business owners should have at least a basic level of understanding with balance sheets. Balance sheets are documents that offer a visual of an individual or business’s financial condition. Every small business owner should be able to understand a balance sheet and be able to interpret the information it conveys quickly.

Balance sheets are usually organized with the assets displayed on one side of the sheet and liabilities on the other. Equity is listed separately and displays how the assets and liabilities ‘balance.”

Assets are subdivided by type, including current and non-current. Current assets (short-term assets) include things like cash, accounts receivable, cash equivalents, prepaid expenses for future services and inventory. Non-current assets (fixed assets) include equipment, patents, investment property, biological assets, notes receivable, copyrights and more.

Liabilities also come in different subcategories. Common liabilities include accounts payable, provisions for court decisions, promissory notes, corporate bonds and more.

When liabilities are subtracted from assets, the result is equity. Equity is usually found on the same side of the sheet as liabilities but it will have its own space/column. Equity represents the value or net worth of an entity. This section may be broken down so various owner interests can be shown.

Although it may make sense to be able to look at equity when trying to get an idea of a company’s general condition, equity alone can be misleading. Balance sheets are time-specific and can vary by fiscal period. Business owners need to look to all elements of all of the balance sheets to get a greater picture of the company’s financial health.

Most small businesses have simple balance sheets that are easy to understand. The information shared here should be enough to help any entrepreneur to understand balance sheets for the benefit of their business.