Tuesday, January 10, 2017

Your Accounting Balance Sheet: The Small Business Owner’s Guide

How much money did you make last year? That’s what a lot of business owners want to know right now—and for good reason.

As a bookkeeper, my answer when you ask me how much money you made will often be, “You’re asking the wrong question.”

Instead, the first question you ask should be: Is the accounting balance sheet accurate?

Making Sense of Your Accounting Balance Sheet

If your accounting balance sheet is not accurate, then your profit and loss is worthless. And by worthless, I mean, literally worthless. Whatever your profit and loss says you made this year is completely unreliable if your accounting balance sheet isn’t complete and accurate.

You make 5 “management assertions” when you present financial statements to someone:

1. Accuracy: Are all transactions recorded, and without errors?

2. Classification: Is everything coded to the correct accounts?

3. Completeness: Is anything missing/unrecorded?

4. Cutoff: Is everything recorded in the right period?

5. Occurrence: Did the transactions that were recorded actually take place?

I cannot tell you how much money you made until I’ve confirmed all of the above, and that requires a thorough review of your accounting balance sheet.

What is an Accurate Accounting Balance Sheet?

Your Accounting Balance Sheet is a snapshot. It’s a moment in time, and it answers 1 simple question at its foundation….

What is your company worth?

Isn’t that a better question than how much money you made? You can make $1 million, and then you can spend $1.5 million and your company isn’t worth squat. I have no idea what “squat” is actually worth. In this case, I suppose it’s $500,000.

The balance sheet is broken up into 3 parts:

1. Assets: The things you own or have rights to collect (e.g., cash, accounts receivable, employee advances).

2. Liabilities: The things you owe or have obligations to pay (e.g., accounts payable, payroll liabilities, loans payable, customer deposits).

3. Equity: The book value of your business (assets – liabilities = equity).

The total equity at the bottom of your balance sheet is the book value of your business.

In the video above, I show you some transactions to help demonstrate how the accounting balance sheet works, how to analyze it, and a bit on how to review it.

If you missed it, be sure and catch last week’s post “Here’s Everything You Need to Understand Your Statement of Cash Flows.”

The post Your Accounting Balance Sheet: The Small Business Owner’s Guide appeared first on Fundera Ledger.

from Fundera Ledger https://www.fundera.com/blog/accounting-balance-sheet

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