Life is all about balance. Whether you are trying to live a healthy lifestyle or juggling work with leisure, the decisions you make on a day-to-day basis are all about maximizing your routine. Just like finding balance is an important part of your daily routine, accounting is all about “balance” as well; balance sheets to be more specific.
Balance sheets are a snapshot of a business, once you can understand the basics of a balance sheet; it is very easy understand the basics of a company. Below I will break down the basics of a balance sheet.
Butet us start off with Accounting 101. I like to use a simple formula/acronym to remember the blueprint of balance sheets. (A.L.O.E)
Total Assets = Liabilities + Owner’s Equity.
Assets are broken into two sub-categories, long term assets or current assets. Current assets are very liquid (easily converted to cash) and the most common current assets are cash and accounts receivable. Long term assets cannot be easily converted to cash and can things such as property, cars and machinery.
Liabilities can be a little bit trickier than assets, but still have long term and short term categories. Liabilities are considered all debt owed. You can break liabilities down further to include: notes payable, mortgage payable and accrued withholding.
Any liability owed with in the year is considered short term and anything longer than a year is considered long term. Owner’s Equity is the “book value” of the company. Essentially if you manipulate the formula above it is the difference of the assets less the liabilities. This means increases in revenue will cause the Owner’s Equity to increase, but increases in liability will cause equity to decline.
This is the basic layout to understanding your company’s balance sheets. The increased knowledge in understanding basic accounting principles, the easier understanding the flow of business can be, allowing you to make better, more educated business decisions.