What Is a Balance Sheet?
A balance sheet is a financial statement that shows a business’s current assets, current liabilities, and current owner’s equity (stockholder’s equity). Two formulas called the –balance sheet equation” and the –net working capital equation” yield the values that are used to come up with those numbers.
The balance sheet equation is as follows:
- Assets ” Current Assets + Long-term Assets
- Owner’s Equity ” Stockholder’s Equity + Long-term Debt + Owner’s Capital
- Current Liabilities ” Current Liabilities + Long-term Liabilities
The net working capital equation is as follows:
- Current Assets ” Current Liabilities + Working Capital
- Working Capital ” Current Assets – Current Liabilities
The balance sheet and net working capital equations show an entrepreneur’s current holdings, and the current assets and current liabilities are recorded liabilities that represent cash and/or assets that are expected to be realized within one year. Given those two formulas, a balance sheet can be created and analyzed to figure out an individual’s current financial position.
Why Is the Balance Sheet Important?
One of the keys to running a successful business is to make sure your’re always in the black. This is easiest through good bookkeeping which can help you better understand your finances and helps you keep track of your expenses so you can see any areas that may need to be improved or adjusted.
The first step in a business’s financial success is keeping detailed, accurate financial records. At the end of the day, that’s what this accounting stuff is all about.
Business owners rely on the goodwill created by their product or service, and their customers look to them in order to make a decision to buy