Understanding the Balance Sheet

The balance sheet is a financial report that shows the condition of a company's assets, liabilities and equity. In conjunction with the income sheet, these reports give a good indication of how well the business is doing. Assets are equal to liabilities plus equity. Keep your chart of accounts

simple when starting out and add to it as needed.

Assets may include cash accounts such as checking and savings, accounts receivable (if you sell on open account), prepaid expenses (like insurance paid in advance), vehicles that the business owns, equipment and machinery, buildings (if business owned) and inventory (if applicable).

Liabilities include debt such as accounts payable (if you buy on credit as opposed to paying cash), credit card payable and loan payable.

The equity section, which shows the earnings, is simply the difference between assets and liabilities.

The balance sheet gives you a snapshot at any given time of the strength of the company. Some important facts that cannot easily be determined by viewing the balance sheet are the age of accounts receivable and accounts payable. Further examination of those accounts can determine whether problems exist. Old receivables and payables can denote cash-flow problems.