What Is a Balance Sheet in Accounting?
A balance sheet is an essential tool used in business accounting. Also known as a statement of financial position, it offers an overview of a business’s financial balances. From sole proprietorships to Fortune 500 companies, all businesses can benefit from creating balance sheets. To take advantage of this accounting tool for your business, though, you must first understand the basics of a balance sheet and what it entitles.
Overview of Balance Sheets
A balance sheet is an accounting document that reflects your business’s net worth at a specific time. It consists of your business’s assets, liabilities and owner’s equity. A balance sheet expresses how much your business is worth, in terms of equity for the specified period. If you’re trying to calculate your business’s worth for the previous year, for example, you would take all your business’s assets from the previous year and subtract that number by all its liabilities for the previous year, resulting in your business’s total equity for that year.
Why should you create a balance sheet exactly? Well, there are other ways to calculate your business’s worth, but using the formula associated with balance sheets offers one of the most accurate ways to measure its worth. Furthermore, balance sheets are relatively simple, consisting of just a few financial metrics. By creating balance sheets on a regular basis, you’ll have a better understanding of your business’s financial health.
Balance Sheet: Assets vs Liabilities
When creating a balance sheet, you’ll need to separate your business’s assets from its liabilities for the specified time period. Assets, of course, consists of items such as cash, inventory, accounts receivables, prepaid expense, accrued revenue, equipment, property, goodwill and investments. In comparison, liabilities consist of items such as accounts payable, deferred tax and interest on loans. For an accurate and effective balance sheet, you must calculate all your business’s assets and liabilities for the given time period.
How to Create a Balance Sheet Report
Assuming you use Quickbooks to keep track of your business’s financial transactions, you can easily create a balance sheet in just a few clicks. While logged in to your Quickbooks account, click the “Reports” tab on the main menu, followed by “Balance Sheet.” You can also see a higher level summary of your business’s balance sheet by choosing the “Balance Sheet Summary” report instead of “Balance Sheet.”
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