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Have you heard the old adage, "Make hay while the sun shines?" In simplest terms, the equity section of a balance sheet tells us exactly how much hay is in the barn.
This section of the balance sheet is usually the most confusing. Understanding it asks us to be a bit abstract.
Assets are straight forward. Liabilities are too. We know what we own, and we know what we owe.
Equity on the other hand is what our business is worth in accounting terms. (The equity section does not account for Goodwill that has been established.) To determine the true value of your business you would need to speak with a valuation expert.
In the simplest terms, equity accumulates the profit/loss throughout the life of the business, initial investments or injections and amounts withdrawn from the business. The exact way these are handled will depend on the type of entity.
The piper has come to town and he sits squaring in the liability section of your balance sheet. He waits for payments and the day he can leave town.
Liabilities are the amounts owed. This can encompass your light bill to a partner buyout.
Ultimately, the less liabilities, the better, but liabilities aren’t all bad. They make sense when lower interest rates are available. In this scenario, financing frees up cash during asset acquisitions.
Ultimately, it’s all about keeping the piper under control, because he can sneer and make us lose sleep at night if left unattended.
Assets are arranged by liquidity as we talked about in the prior post. Liabilities, on the other hand, are listed based on payback period. Liabilities are merely balances. They do not describe the type of expense. The balance in a liability account is akin to the payoff balance on your car not the car itself.
Acquiring. Consuming. Owning.
In today's society, these are our favorite words. Discussions around many boardroom tables and wine bars center around prepping a budget to include the next asset acquisition.
How do we account for such valuable stuff?
Actually, it’s pretty easy. For most of us, we can get our head around tangible items we can see and touch.
Let's get started!
Assets start the party and come first on the balance sheet. Examples of assets include, cash, accounts receivable (although we haven't received the funds, they are DUE to us,) investments, fixed assets, intangible assets and other assets.
Assets are listed in order of liquidity. Cash is listed at the top because, duh, it is the king of liquidity. Yet land, for example, although extremely valuable, comes much later.
How about I offer you a down and dirty – straight to the point – boiled down version of the seven things you need to know about financials to be the savvy business owner you aspire to be?
Because, let's be honest, most of us aren’t going to raise our hand and volunteer to sit through Accounting 101!
This marks the beginning of a seven-week blog series covering the six major categories found within financial statements. Each week we will go in-depth to clearly identify what you need to know quickly, easily and efficiently to produce the best reports possible.
By understanding the in’s and out’s of each category, you can totally up your accounting game! And doesn't everyone want to do that??
After the series you will:
Week 1: Short Introduction to the Dynamics of the Balance Sheet (BS) & Profit & Loss (P&L)
Balance Sheet Categories
Week 2: Assets
Week 3: Liabilities
Week 4: Owner’s Equity
Profit & Loss Categories
Week 5: Sales
Week 6: Cost of Goods Sold
Week 7: Expenses
Let’s get started on our Week 1 Introduction!
Hi! It's Bridgett here! Are you ready to take your business to a new level? Let's do it!
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