Let’s look at the Financial Statements in a little more depth, starting with the Balance Sheet. Accountants luuuurve the Balance Sheet. Why? Because that one piece of paper tells mucho mondo important things about a company. It’s Fabulous!
With a quick glance at the Balance Sheet, I can tell how much cash a company has, if they can meet their bills, and for how long, as well as the total of all the stuff they own, the total of all the things they have to pay, and the total of all the money they’ve made (or lost) over the life of the company. Trust me, the Balance Sheet RULES!
So, let’s break it down into some manageable bits.
The Balance Sheet is made up of three parts: Assets, Liabilities and Equity. I’ll go over each one in the next few days in greater detail, but here’s a little taste:
Assets – Things you own that have value or usefulness. This is everything from the cash in your checking account to the desk you sit at.
Liabilities – More or less, money you owe other people. The bills you need to pay, the mortgage you need to pay, the sales taxes you’ve collected.
Equity – Basically, what you own free and clear if you paid off all the bills, etc., you owe. We’ll get to a better definition, but go with this one for right now.
The Balance Sheet is where the basic financial statement equation comes from:
Assets = Liabilities + Equity
Which, we’ll learn more about later. Don’t let that equation scare you. I can promise you there won’t be any trains coming from another station, so no need for algebra flashbacks. ☺
Think of the Balance Sheet like a movie. The totals on the Balance Sheet are running totals since the first day you started the company. Unlike the Profit and Loss Statement, which is a snapshot of how the company did during a period of time.
And, there you have it: the basics of the Balance Sheet. This piece of paper can tell you everything you need to know about the health of your company. With just a quick glance you can see what you own, what you owe, and the remaining balance of what’s left after you subtract what you owe from what you own.
Okay, tomorrow, the Income Statement. See you then!
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