Understanding Basic Accounting Terms

When you set out to create your small business, you probably didn’t imagine yourself casually using accounting terms like “current assets” or “equity”, but the truth is that in order to have a good sense of your financial health, there are just some accounting basics that you’re going to need to master and the basic balance sheet is one. A balance sheet gives you a simple and straightforward way to quickly assess what your business owns, what it owes, and what its equity shares are, and can also provide this essential information to potential lenders and investors. Balance sheets are not difficult to prepare, and should be updated on a regular basis, with some businesses refreshing them monthly, some quarterly, and some annually.

A balance sheet gets its name from the fact that its three sections need to be added together in a way that provides a balanced equation, with liabilities and equity adding up to assets. Let’s look at each of these sections to get a complete understanding of what they include so that you can prepare your own business’ balance sheet accurately.

ASSETS:

Assets are best understood as everything that your business owns, whether they are liquid, fixed, or something else.  It can include cash or things that are expected to become cash, money that you have access to immediately, and money that is owed to you by your clients. It also includes the value of the products that you have ready to sell (inventory) and the value of any services that you have already paid for ahead of time such as prepaid insurance premiums. Assets also include bank accounts such as money market accounts and other investments and securities.

In addition to these current assets, the asset category should include fixed assets that are not expected to be sold, such as equipment, buildings, land used for the business, and vehicles. It is important to remember that fixed assets often decrease in value, and those that do need to be reported in a way that reflects their depreciation.  Assets also include intangibles such as goodwill, patents and copyrights.

LIABILITIES:

Liabilities can also be understood as debts, and when adding up your liabilities on your balance sheet you should include the full value of your accounts payables, taxes such as sales, payroll and income taxes, any payments due on short-term business loans or lines of credit, and even long term liabilities such as leases or mortgages and employee pension plans.

EQUITY:

The equity section of the balance sheet is where you record the value of payments received from investors, the value of any capital stock, and all retained earnings being kept in the business’ holdings and not distributed to shareholders or partners.

When you enter the figures for each of these three categories, remember that when you add your bottom line of your liabilities and your equity it should be equal to the amount you have recorded as your assets, and your equity should also be the equivalent of your assets less your liabilities.

By accurately recording all of your business’ assets, liability and equity you are able to get an immediate sense for your business’ financial strength. A balance sheet can tell you whether you have enough money available to expand your business ad handle the highs and lows of a normal business cycle or expenses and revenue, whether you need to build your cash reserves, and whether you’re paying your bills too quickly, leaving yourself short of funds.

By understanding the information provided on a balance sheet a business owner is able to determine how to handle their inventory management as well as their collectibles. Go here for a more in-depth balance sheet explanation.

If you are uncertain of how to put together an accurate balance sheet or want assistance from a skilled St. Petersburg professional, contact Tom Gargiulo, E.A. today at 727-345-7790 for help.