Balance Sheets are financial reports or statements that detail the assets and liabilities of a business. If you are going to run a small business you need to understand what Balance Sheets can tell you about your business.
A Definition
A Balance Sheet is a statement of the financial position of a small business on a given date. It provides details of its asset holdings, liabilities and the owner’s investment in the business. A Balance Sheet reflects the basic accounting principle that Assets equal Liabilities plus Owner’s Equity.
Assets are the resources owned by the business. In comparison, liabilities and the owner equity tell you how those resources were financed.
Although the Balance Sheet is very useful for evaluating the financial performance of a small business, they do have some limitations.
- They present a picture of the business as at a specific date, rather than over time.
- The asset values reported in the Balance Sheet do not necessarily reflect the current or market value. This is because assets are recorded using the purchase price. The value reported is the historical cost of an asset, less accumulated depreciation rather than current or market value.
- While depreciation of long-term assets is a generally accepted practice, the converse is not true. Appreciation or enhancement of assets is generally not recognized in the Balance Sheet. Unless the assets are formally re-valued or the asset is altered materially.
- There may be some items that have a financial value that are not included in the Balance Sheet. This is because it is difficult to assign an objective value. An obvious example of this would be the human resources of the business.
So what does a balance look like?
Other Small Business Financial Statements
If you landed on this page without seeing the other pages related to the financial statements you will be preparing for your small business, click on any of the links below.
- Profit and Loss or Income Statement,
- Cash Flow Statement,
- Aged Debtors Report.
