Business Accounting Basics: Understanding Your Balance Sheet
As the owner of your own business you work long and hard to juggle all of the many important aspects of your business, and there are probably certain tasks you enjoy much more than others. Don’t fret, that’s common. And one of the areas of business that is least enjoyable to many business owners is accounting. Unfortunately it’s a term that has gotten a negative reputation over the years, often due to people’s lack of understanding how it works.
One of the documents that you should become most familiar with is called the balance sheet. This is an accounting of what you own (assets), what you owe (liabilities), and what you’re worth (equity). The goal in maintaining your balance sheet is to ensure that the two sides of the document match, with assets on one side, and liabilities and equity on the other.
Before we dig into the elements of a balance sheet, it’s important to mention that we always recommend that our clients engage the services of a bookkeeping professional. We’re so committed to the value of this service that we offer it in house. But, especially if you’re not ready to make that leap you should understand these important details about your balance sheet.
Accounts Payable And Receivable
Accounts payable refers to the money that is owed by your company to other companies or individuals and accounts receivable refers to the money coming in to your business in the form of payment for good or services. Staying on top of those numbers and ensuring that more money is being made than is being paid is essential in business accounting basics.
The products that you have stocked in your shop or warehouse hold a value of their own. It’s very important to take this into consideration when compiling your balance sheet. And even more importantly, periodic physical counts of your inventory will help keep your books straight.
Chances are you have borrowed money to purchase your workspace or invest in new equipment. Bank loans and mortgages are important items on your balance sheet, because without accounting for these figures you might misrepresent how much money you actually have to spend.
Depending on where you are in the life of your business it may be difficult to imagine making more money than you spend each year. But ideally, that is the goal. Your retained earnings is a critical part of your balance sheet and demonstrates the equity you have in your business.
The more you learn about your business’ accounts, the better you can be financially prepared to make the best decisions to help it thrive. If you’d like more business accounting basics, or would like to learn more about our accounting and bookkeeping services, contact us today.