Are you a business owner? Knowing how to interpret financial statements is a necessary skill used to make important decisions and understand where your business is standing financially.
The balance sheet is a financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time.
What a balance sheet shows
A balance sheet tells you what the company: 1) Owns 2) Owes 3) The amount invested by shareholders and earnings retained by the company.
Why is the balance sheet important?
The balance sheet is an invaluable piece of information for investors and analysts; however, because it is static, it is recommended to draw on data from an income statement and a statement of cash flows to paint a fuller picture of what's going on with a company's business.The balance sheet can also be compared to prior periods to see trends in the business.
The balance sheet formula?
The basic formula to create a balance sheet is:
assets = liabilities + shareholders’ equity
Assets, liabilities, and shareholders' equity each consist of several smaller accounts that break down the specifics of a company's finances. These accounts vary significantly by industry and business model.
If you're a sole proprietor filing either a Schedule C or Schedule F along with your individual income tax return, you may not be preparing a balance sheet each year due to the fact that it is not required to be filed with your tax return. If your business entity files its own return, you may be required to also provide the balance sheet along with filing of your tax return.
In either case, it is important to maintain books and records to be able to produce a balance sheet to understand the financial position of your business. There are many bookkeeping tools and softwares you can use, in Parks Tax & Consulting, Xero is the software of our choice.
This post may not contain a complete analysis of the tax issues discussed herein and does not represent official conclusions or advice regarding the matter.