To track your business’ growth (or contraction), you need to create and review your balance sheet regularly. A balance sheet tells you the net worth of your business at a given period, the end of a year for instance. If done right, it should accurately reflect the liabilities and assets of your business as well as your equity.
To make things easier, you could use an online accounting software from companies like ScaleFactor, Inc. instead of doing the process manually.
What’s on a balance sheet?
Essentially, your balance sheet should follow this equation: Assets = Liabilities + Equity. First, list all your assets such as property and money, then categorize them further into current and noncurrent assets. Current assets include money, accounts receivables, prepaid expenses, and inventory. Noncurrent assets include tangible property like land, buildings and equipment, and intangible property like trademarks and copyrights.
Next, the liabilities on your sheet should include all your debts and obligations that could negatively impact your business’ net worth. These include current and fixed liabilities. Current liabilities are those that you could reasonably anticipate to be due within the year such as payables, short-term borrowing funds, accrued expenses, and unearned revenue. Fixed liabilities include mortgages, bonds, and other loans.
Your balance sheet also includes your equity, which is the value of your interest in the business. You have a positive equity if your assets are worth more than your liabilities.
How to create a balance sheet
You could do this manually by using two columns and entering your assets in the left column, and your liabilities and equity in the right column. Once you have totaled the sum of the equity and liabilities, the answer must be equivalent to the total assets. You could consider using an accounting software capable of generating a balance sheet for you based on certain information you inputted.
Your balance sheet is one of your business’ most crucial financial statements, so you need to understand how it works. You need to do it right, so you get a clearer and more accurate financial picture of your business.