How does a balance sheet work?

Written by dale devries
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How does a balance sheet work?
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What is a Balance Sheet?

A balance sheet is a financial report that shows the financial picture of a company at a given time. Balance sheets are normally done monthly or quarterly depending on the nature and volume of the business. The basic principle of the balance sheet is to show what you own, what you owe and how much you personally have invested in your business. It gives you a picture of whether or not you can pay your creditors, how you manage your inventory and how you manage your billing. This is a helpful tool to improve your business.

How the Balance Sheet is Structured

There are two columns to a balance sheet. The first column lists what you own, or your assets. This includes your cash on hand, accounts receivable and inventory. You will also want to include prepaid and other expenses. You may also have other assets such as a note due you that will come due at a later date. In the left column you would list your liabilities. These include loans that you owe, accounts payable and taxes that you may owe. Both sides of the sheet are totalled and the owners net worth or investment is added to the liabilities side and then that column is added again. Both numbers on the sheet should equal each other, hence the name balance sheet. If they don't, you know you have missed something and should go back through your accounts again.

Information Provided by the Balance Sheet

The information on your balance sheet can help a bank decide whether to lend your business money or not. This is one reason you would want to know exactly what's going on all the time. You have a chance to improve your company, thus making the sheet more appealing to the bank. It can show you if the financial status of your company can handle hiring more employees or giving the current ones a raise. And, if you ever wanted to sell your business the buyers would want to see your balance sheets. Once you've done the sheets for a year, you can see how your business is growing or if the market is declining. You can see if there are areas where you need to cut back or maybe spend more money. Just by maintaining this one financial form, you can have a wealth of information at your fingertips.

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