Your balance sheet is critical to having a better grasp of your company's finances. That said, many small business owners aren't taking the time to familiarize themselves with their balance sheets and are rather leaving the bulk of that to accounting. And while that is certainly fine, knowing what it's all about and understanding where the company stands during a given period is important for all key players in the business, particularly the business owner. This will enable you to make smarter and more effective decisions moving forward. In this article, we will explore the various accounts that make up a balance sheet.
Understanding The Different Accounts
You might think of a balance sheet organization as something like a file cabinet. In order to organize finances and therefore ensure that all balances out as it should, the balance sheet is comprised of various accounts. Among the most consequential balance sheet accounts:
- Cash. So this will include all the cash that is made as a result of what amounts to everyday transactions. If you make a sale and then receive the payment for that product, this would fall into the cash account. Cash is listed out as a current asset on the balance sheet.
- Deposits. Deposits represent those transactions in which you receive security deposits to use for future charges for someone—this also is considered a current asset.
- Accounts receivable. Accounts receivable represents that which you are owed for products/services already given and/or rendered but for which you have not yet been paid. Such are listed as assets.
- Prepaid expenses. So for example this might include rent that you have paid in advance even before you utilize the space. This also is recorded on the balance sheet as an asset.
- Intangible assets. These are assets owned by the company that is considered to be non-physical, so for instance patents, copyrights, and the like. These are current assets on the balance sheet.
- Accounts payable. Versus accounts receivable, this will be what you owe others, to include suppliers or creditors, and would fall into the current liability category.
- Accrued expenses. Also in the liability category, this would include things such as wages, repairs, taxes, bonuses, and so forth.
- Credit cards. Any purchases made with a credit card for the business specifically fall into the liability category.
- Short-term investments. These are such that can be easily converted to cash (one year or less/) and get listed in current assets.
- Long-term investments. Because these would take longer to convert to cash—for example, real estate, bonds, etc.—these fall into the asset category.
- Short-term debt. So basically, this accounts for any debt that is owed within a year's time. An example of this might be payroll taxes.
- Long-term debt. Among these types of accounts are long-term loans and any lease obligations for example; this gets listed in liabilities.
- Equity. The shareholder's equity gets listed in its own section on the balance sheet. Among the items included here is stock value, amounts paid out, and retained earnings.
Looking at Accounts Receivable
Those are the primary types of accounts contained within a company's balance sheet. Looking closer at some of the components, accounts receivable is one of the more important that businesses need to keep their eye on in generating their balance sheet. Customer transactions are what keep businesses up and running. That said, if you are delivering your product or service and the customer isn't paying, this could have a detrimental effect on the company's financial health. Accounts receivable lets you keep track of what is owed and consequently identify any negative patterns in this regard. And they are thought of as current assets as in all likelihood they should be converted to cash in less than a year.
Understanding Accounts Payable
By the same token, you absolutely want to keep an eye on how much is going out of the business. Accounts payable is another key account on that balance sheet. These are payments that the business owes to others. So in that sense, they would be accounts receivable for whoever is owed the money. As with your own accounts receivable, you want to ensure that you pay your bills in a timely manner. Falling too far behind and subsequently too far into debt with a supplier can be problematic down the road, for the company's overall finances and for your relationship with that supplier.
Reconciling Accounts
What does it mean to reconcile balance sheet accounts? First off, you're going to have to compare the balance sheet to other sources. This could be your bank statement—which for most smaller businesses this is the case. This is fine for dealing with cash accounts. When it comes to accounts receivable and payable though, you will likely have to use your ledger. Comparing what is listed on the balance sheet to these sources enables you to make sure that the numbers are in fact correct. All accounts should match up. If for some reason they do not, then you need to double-check those numbers to see where the discrepancy occurred.
You should aim to reconcile your balance sheet at the end of every month. Also, do this for the quarter and of course annually as well. Having an accurate balance sheet, such that reconciles with other statements means that now you have a crucial tool at your disposal to give you a better understanding of the company's financial health and also to help you make key decisions for the business.
A Budgeted Balance Sheet
Regardless of where your budget stands, you are definitely going to want a budgeted balance sheet in addition to the current one. What is a budgeted balance sheet? Basically, this will estimate for future periods. That is to say, if you stick to a budget based upon predictions you make from your current balance sheet, then the budgeted balance sheet shows where you should be at the conclusion of the next budgeting period.
First Union Lending has worked with numerous small business owners. We want to get you the cash you need for whatever project you have in mind or even just to weather a difficult financial period. Call today!