The Balance Sheet – What does this do for you?

There are two main reports that are included in what are called your "Financials," the Profit & Loss Statement, which we have covered in a previous article and the Balance Sheet. The Balance Sheet is another critical document which reflects the value of your company. On the Balance Sheet is listed your assets, your liabilities and your equity. So the accounts that are showing on this report are different from the accounts showing on your Profit & Loss Statement. In fact, the final bottom line number from your Profit & Loss is reported on your Balance Sheet. The profit or loss of your company becomes a part of the value of your company and is recorded on the Balance Sheet in the equity section.

The Balance Sheet shows your total assets, total liabilities and total equity. It is based off of the accounting equation, which is:

Assets = Liabilities + Owner's Equity

Within Owner's Equity falls all the working accounts that are tracked daily, weekly, monthly or quarterly, called Revenue, Expenses, Gains, Losses, Contributions and Withdrawals accounts, and are reported on the Profit & Loss Statement. When an accounting period is closed, the total of these is closed into Owner's Equity.

So a more expanded version of the Accounting Equation would be:

Assets = Liabilities + (Previously recorded Owner's Equity + Revenue - Expenses (P&L) )

So with this understanding of the Accounting Equation, you can see the difference between the Balance Sheet and the Profit & Loss Statement. The Profit & Loss is a part of one aspect of the equation and the Balance Sheet represents the whole equation.

What kind of management value can we get from the Balance Sheet? The Balance Sheet shows you what your company is worth. It shows how much you have in assets, how much you have in equity, in liabilities. Equity is what is left over after you subtract your liabilities from your assets.  The Balance Sheet is one of the reports that the bank will look at to see how stable your company is and if there are enough assets and equity to make your company worth loaning to. The Balance Sheet will tell you if your company is "upside down" in that you have more liabilities than assets. This is obviously not a good situation, but definitely something you would want to be aware of, if it was the case. It will tell you if you have equity to reinvest back into the company. This is a report that is normally looked at monthly, where as the Profit & Loss may be something you refer to more often as it reflects the day to day picture and the Balance Sheet reflects the overall "Big" picture.

Your cash accounts are reported on the Balance Sheet as assets, but again this is not the place to look to see how your cash flow is doing. Neither the Profit & Loss nor the Balance Sheet is a cash flow management tool. There are other reports in QuickBooks that can help with that, but again in order to use them, you would need to have all entries in your books.

So though you do not look at the Balance Sheet often, it holds critical information in making the big decisions of your company's future. Get to know it and thoroughly understand it.

On both the Profit & Loss and the Balance Sheet, if you are still not clear on how to read them and get the info you need from them, seek out a professional to train you. If you have outsourced to a bookkeeping or accounting firm, then ask them to help you with this. It is critical to your running your business and every business owner should know his "Financials" backwards and forwards.