A balance sheet is a financial tool used in business to determine a company’s assets and liabilities at a specific point in time (for instance, Dec. 1 of the calendar year). It is a snapshot of the company’s financial situation at the date of the statement. Assets are listed on the left side of the balance sheet, while the liabilities are listed on the right. Both must equal the same amount and thus “balance” each other out. It’s important to understand how a balance sheet works to know how the money is flowing in and out of your business. Using a balance sheet can help you make decisions about your business and give you an understanding of where your business stands financially. If you’re seeking investors, this financial document can give them insight and help them to decide if your company is worth the investment.
What Are Assets and Liabilities?
Assets and liabilities may appear side by side on a balance sheet, but they differ when it comes to what they actually represent. There are varying types of assets, just as there are different types of liabilities.
Assets
Assets are the properties owned by the business, which usually are used in production but may be sold at any point. Assets can be either tangible, such as equipment, supplies, and inventory, or intangible, such as intellectual property. A tangible asset is an actual object, something that can be seen in physical form and used for the business. Examples of tangible assets include:
Production equipmentBuildingsLand Inventory
Common office supplies, such as paper, computers, and printers, can also be in this category, although they may not be included if they get used up over time. Intangible assets are the opposite of tangible assets, as they are not physical property but rather something that isn’t seen, such as a service or a benefit. Examples of intangible assets include:
Trade names Branding aspects Networking contacts Intellectual property, such as trademarks, copyrights, patents, and websites
Intangible assets are important because they can be of high value, but they are not specifically listed on the balance sheet.
Current Assets vs. Noncurrent Assets
Assets are also categorized according to the time period during which the business expects to turn them into cash. Current assets are those that will be cashed in within the current fiscal period, which is usually one year. Noncurrent assets are long-term assets that can’t be liquidated within the current fiscal period. For example, the inventory a company owns—but expects to sell within the current fiscal year—would be considered a current asset. If the asset, such as intellectual property or equipment used in production, can’t be converted into cash within that specific year or time period, then it is considered a noncurrent asset.
Liabilities
Liabilities are the debts owed by the business. They include anything the company still owes, whether it be to employees, customers, or investors. Some examples of liabilities include expenses such as loans, payroll, and accounts payable. Liabilities are also categorized, just as assets are, according to the time period when the debts are to be paid. Current liabilities refer to debts owed by the business that should be paid within the current fiscal year. Noncurrent or long-term liabilities are not yet due within the current fiscal period. For example, one current liability that should be paid within the fiscal period is the salary due to employees. Because employees typically receive their payment within the month in which they worked, these payroll expenses would be considered current liabilities. Examples of noncurrent liabilities include taxes or loans that are to be paid in increments and are not yet due within a current fiscal period.
What’s the Difference Between Assets and Liabilities?
Assets and liabilities are both listed on a balance sheet and essentially balance each other out when it comes to a company’s finances. Assets are what the company owns, but the liabilities are what the company still owes. They are basically opposite in meaning: Liabilities refer to the outward dealings and transactions of a business, while assets refer to the incoming dealings and items of value. The main difference between assets and liabilities is that one adds to a company’s net worth while the other deducts from it. Assets are the things owned by a company and therefore add to the company’s value. Liabilities are what the company owes, whether to employees, customers, or banks. Liabilities can have a huge impact on a business if they exceed assets, a situation that can hinder its growth.
What Is Equity?
Equity is commonly known as shareholder’s equity or owner’s equity. When listed on a balance sheet, though, it may also be referred to as net worth or capital. A shareholder’s equity equals the number of assets minus the number of liabilities. This is essentially the profit that belongs to the owners once all debt is covered. On the balance sheet, equity is placed on the right side with the liabilities. The commonly used formula for the balance sheet is: Assets = Liabilities + Shareholder’s Equity Therefore, the formula for calculating equity is simply: Shareholder’s Equity = Assets - Liabilities Calculating the net worth of your business is important so that you know where your business stands financially. Net worth reflects the value of a company from the investors’ perspective and can affect their decisions to invest. Knowing this also helps to improve your understanding of whether your business can afford upgrades and other improvements.
