A balance sheet details a small business’s assets, liabilities, and the owner’s equity. It is a tool to help your business decide what means are available to keep the business profitable. The balance sheet is the only financial statement in the multitude of commonly used financial reports that actually relates to your company’s financial condition at one specific point in time and can advise you if your business is profitable. A majority of other statements track your business’s financial health over a set period of time.
Bob owns a one-man lawn cutting company that has just ended their second year in business and is in the process of calculating their yearly balance sheet. His first year balance sheet had $60,000 in assets, $55,000 in liabilities from long-term debt on equipment purchases, and $5,000 in equity. Applying the balance sheet equation, Bob’s assets equal his liabilities plus assets ($60,000 = $55,000 + $5,000).
After preparing his second year balance sheet, Bob currently has $65,000 in assets, $55,000 in liabilities, and $10,000 in equity. Based on this, his assets again equal his liabilities plus equity ($65,000 = $55,000 + $10,000).
However, the second year balance sheet indicates a $5,000 shift in Bob’s assets and equity. Without looking at line-item specifics, it is clear that Bob has found a way to increase his equity by $5,000 in his second year in business. This could be the result of individual capital infusion, increased revenues, contribution of equipment bought with owner’s cash, or a combination of these factors. Either way, analyzing the differences between Bob’s first and second year balance sheets can give him a quick indicator of how well his business is performing and help him plan for further increasing his business’s profitability in the future.