The balance sheet

In addition to the cash flow statement and income statement we have a third financial statement that we will review and that is the balance sheet. They are interrelated and with the set of this information we have a fairly complete view of the financial health of the business each time an accounting cut or close is made.

The first two are flows of inputs and outputs that are collected from a given period (from one date to another), the balance sheet is the economic and equity situation at a particular time. It draws on information from the other financial statements through balances.

It shows us the assets (what we own to generate profits) against the liabilities (what we owe to third parties) plus the equity (our resources: capital + result of the period). This way we can confirm at the end if there is a balance:

• Assets=Liabilities + equity

• Or what is the same equity= assets-liabilities.

When starting a business the contributed capital coincides with the assets but then the equity is made up of the contributed capital and the reserves plus the result of the period (net profit). If you have accounting information from previous years you can use it in the balance sheet to compare the results and see the evolution of the business to implement the necessary improvements.

Importance of the balance sheet

We need to monitor the finances of the business to see what we have and if we are able to meet our obligations. The balance sheet makes this task much easier. It allows us to know where the business is at any given time by identifying losses, verifying cash, inventories, accounts receivable and payable, debts to third parties, in short, relevant information on assets, liabilities and equity.

In this way we can confirm if we are growing and are in a good position to reinvest or if we have insufficient funds or too much debt to then cut expenses or another strategy.

What does a balance sheet contain?

At the beginning of a balance sheet report are the business name, title, date and currency.

The balances can be grouped in different ways depending on the presentation you choose or the rules you follow, but always breaking down the information under the concepts of assets, liabilities and equity. It can be in the form of an account (in horizontal format, assets on the left, liabilities and equity on the right) or as a report (in vertical format, assets on top, then liabilities and equity). Whether in these 2 forms or others, the important thing is that the information is clearly understood.

The first thing to put is the assets, this would be the first section of the balance sheet where all assets are collected and added up. All fixed and current assets, including investments and inventories (inventory).

Examples: current assets could be cash on hand and in the bank, accounts receivable, prepaid expenses, products/services in stock; and fixed assets could be commercial establishments, equipment, furniture, vehicles, etcetera.

Just an aside to say that products/services can be physical or virtual (intangible). With the development of the Internet, there are many businesses that include products/services designed to be consumed and distributed online, such as course packages and tutorials, software, templates, e-books, audio files, and can also be quotas in seminars and workshops. Currently the range is very wide, but they are assets that your business owns and in which you invested resources.

Then in the second section are liabilities and equity. First the liabilities, where all are collected and added up. Short-term current liabilities and long-term fixed liabilities, including suppliers, payroll, taxes and debts.

Example: liabilities payable in the short term, in less than one year, may be taxes, utility expenses, contracts with suppliers in the short term, goods on credit, mortgage or transportation fees; and long-term liabilities payable in one year or more may be long-term loans, a mortgage in full, accrued expenses that have not been paid on time, deferred taxes, debts with suppliers in the long term, and so on.

Finally, the equity, which includes the capital (shareholders' equity, including any reserves we may have) plus the net income of the income statement for the period (this should also coincide with the subtraction between assets and liabilities).

Finally, check that there is indeed a balance (that fits) and that the assets are equal to the sum of the liabilities plus the equity, otherwise there may be an error and you must redo it. The result may be positive or negative.