The Elements of a Balance Sheet

ASSETS = LIABILITIES + OWNER'S EQUITY

Assets

Current assets:

Assets that are or should be converted to cash sometime this year. On the balance sheet ALL should be listed in order of liquidity (i.e. how fast you can turn the assets into cash) most liquid > least liquid.

1. Cash: - includes checking and savings accounts.
2. Marketable Securities: - government bonds, other stocks owned.
3. Accounts Receivable: - money people owe you when they pay later for what they purchased.
4. Inventory: - anything that will be resold as is or is part of something that is to be resold.
5. Prepaid expenses that you could get refunded if you stopped the service. Prepaids might include insurance premiums paid in advance.

Fixed Assets

These are long term assets that are not expected to be sold in order to create cash. These assets help you earn more cash, such as your property, plant and equipment. If they don't ...sell them off for cash!

Property, Plant, and Equipment:-includes everything that you and your employees use every day to create the value for your customer such as machines, buildings, computers, desks, etc.

Liabilities

Current liabilities

These are liabilities that will consume your cash sometime this year. On the balance sheet liabilities should be listed in order of priority of claim… in other words, those who are expected to be paid first > those expected to be paid later.

1. Accounts payable (trade payables that you owe to someone else)
2. Notes Payable: - a promissory note that you must pay soon that you owe to someone; or this year's mortgage payments --part of a much larger long term liability.
3. Payroll taxes due: -self explanatory ---do not let this one go unpaid!
4. Accrued wages due: - what you owe your employees -- not paying this one can really put you in a bind

Long term liabilities

These are liabilities that are NOT expected to consume cash in this year. These liabilities are closely related to the long term assets in that you try to match the life of the liability with the life of the asset.

Mortgages and long term loans for Property, Plant, and Equipment are examples of long term liabilities.

Owners Equity*

Owner's equity is the difference between the total amount of assets and the total amount of liabilities. Owner's Equity is also termed your business' net worth. In some cases there are different classifications of "owners equity" such as preferred stock, warrants, and different grades of common stock.

* Owners equity has been overly simplified for this discussion.

Want to see how your business' Balance Sheet would look?... You can download sample Balance Sheets here.

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