A balance sheet is used to evaluate the status of a company’s finances, providing a snapshot of the organization’s financial health at a glance. The sheet gives the owner of the company and the company’s shareholders a concise summary of the business. It does this by outlining the business’ assets versus its liabilities. When applicable, the balance sheet will also reflect any investments derived from shareholder equity. Here is a closer look at these three factors.
In listing your business assets on the balance sheet, they should be listed from most easily liquidated to those that cannot be converted quickly to cash. The assets at the top of the list should be those that can be liquidated in under a year. The first items on the list should be cash holdings, including CDs and treasury bills. Securities that can be quickly liquidated should also be included in the top portion of the list. This should be followed by accounts receivable amounts, which is money the organization is owed. The remainder of the list should be inventory, raw materials, and prepaid services.
In the liabilities column, any amounts the company owes to other entities should be included. This includes the money to be paid for utilities, building leases or mortgages, equipment rentals, and money owed for vendor services. Current liabilities, or expenses that must be paid within one year’s time, should be placed at the top of the list. The bottom half of the list should be reserved for expenses that don’t have to be paid for at least one year.
This column is also commonly referred to as net assets because it’s the amount left over after current debts have been paid. This money is generally paid to shareholders, or it can be reinvested in the business. Instead of directly paying cash to shareholders, some organizations issue preferred stock options. These stocks are assigned a predetermined value and do not lose value in the market.
Maintaining accurate balance sheets is an essential role for any business’ accounting personnel. You can either hire your own accounting team or outsource these needs to an accounting firm. Either choice will provide you with professional bookkeeping services that will help you manage your business more efficiently.