Basic Balance Sheets

Would you like some Tips for Understanding Basic Balance Sheets?

If you are going to run a small business you need to understand what basic Balance Sheets can tell you about your business.

A Definition

A Balance Sheet is a statement of the financial position of a small business on a given date.

It provides details of its asset holdings, liabilities and the owner's investment in the business, and reflects the basic accounting principle that Assets equal Liabilities plus Owner's Equity.

Assets are the resources owned by the business, whereas liabilities and the owner equity tell you how those resources were financed.

Although the Balance Sheet is very useful for evaluating the financial performance of a small business, they do have some limitations.

• They present a picture of the business as at a specific date, rather than over time.
• The assets values reported in the Balance Sheet do not necessarily reflect the current or market value. This is because generally the historical cost of an asset, less accumulated depreciation, is used as the basis for valuing and reporting assets.
• While depreciation of long-term assets is a generally accepted practice, the converse is not true. Appreciation or enhancement of assets is generally not recognized in the Balance Sheet unless the assets are formally re-valued or the asset is altered in a material way.
• There may be some items that have a financial value that are not included in the Balance Sheet because of the difficulty of assigning an objective value. An obvious example of this would be the human resources of the business.

Would you like to see an example?

If it would help if you could see a sample of a balance sheet you can find one by clicking on this link. Feel free to download or print a copy!

Other Small Business Financial Statements

If you landed on this page without seeing the other pages that relate to the other financial statements that you will be preparing for your small business, click on any of the links below.

• Profit and Loss or Income Statement,
• Cash Flow Statement,
• Aged Debtors Report.

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