How to Read a Balance Sheet

There are three types of financial statements for your business: income statement, balance sheet and statement of cash flows. 

These financial statements help you see the health of your business finances and even the health of your business. 

Let’s learn how to read each of these statements: income statement, balance sheet, statement of cash flows

Balance Sheet

The balance sheet is a summary sheet that tells you what your business owns and owes. 

This is where the general accounting formula Assets = Liabilities + Owner’s/Shareholder’s Equity comes into play. 

An asset is the money and physical items that you have in your business. This includes the cash in the bank, your money market accounts, your retirement accounts, your business’s office furniture, your office equipment, and the accounts receivable, or the money that your clients owe you on payment plans. 

A liability is the money that you owe to someone else. 

The owner’s/shareholder’s equity is the money and property that the owner(s) have put into the business and have borrowed back from the business. 

Side note: The majority of online businesses do not have accounts receivable or accounts payable. They work on a cash basis, so money is only counted when it is received or spent, not when someone owes it to the business or the business owes it to someone else.

What does a balance sheet look like? 

Here is an example of a balance sheet: 

It really is as simple as just reading it down line by line. 

How are balance sheets run? 

Balance sheets are always run on a year to date basis. 

This means that every time you run a new balance sheet is for January 1 through the end of the current month. 

Then on January 1 of the next year, it will be a brand new balance sheet. 

It’s a new balance sheet because the expenses and revenue are reset to zero on January 1 of a new year and then they are rolled up into retained earnings. 

The balance sheet should always equal

It is called a balance sheet for a reason. The total amount of the assets should always equal the liabilities plus the owner’s/shareholder’s equity. 

If the two columns don’t equal then you have a problem with your bookkeeping. 

Your balance sheet

The balance sheet shows you what your business owns and owes. 

For most online businesses (at least the ones I usually work with), the balance sheet is really only going to have your cash in the bank and your owner’s equity. There is nothing wrong with this, as long as your balance sheet equals out. 

Any questions? Anything still confusing?

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