This section concentrates on the categories of fixed assets common to most small businesses: furniture and fixtures, motor vehicles, and machinery and equipment. In this section, two types of liabilities will be explained.
You will continue to use the worksheet at the end of this section. Liabilities are claims of creditors against the assets of the business. They are debts owed by the business. There are two types of liabilities: current liabilities and long-term liabilities.
Liabilities are arranged on the balance sheet in order of how soon they must be repaid. For example, accounts payable will appear first as they are generally paid within 30 days. Notes payable are generally due within 90 days and are the second liability to appear on the balance sheet.
Current liabilities are accounts payable, notes payable to banks or others , accrued expenses such as wages and salaries , taxes payable, the current due within one year portion of long-term debt and any other obligations to creditors due within one year from the date of the balance sheet. The current liabilities of most small. Long-term liabilities are any debts that must be repaid by your business more than one year from the date of the balance sheet. This may include startup financing from relatives, banks, finance companies or others.
Net worth is what is left over after liabilities have been subtracted from the assets of the business. This equity is the investment by the owner plus any profits or minus any losses that have accumulated in the business.
Step 4: Complete the Net Worth Section of the worksheet. When this is done, you should have a completed balance sheet for your business. In the next section, four simple formulas will be introduced to enhance the information contained on the balance sheet. Now that you have created a balance sheet for your business, there are some easy calculations that you can perform that will give you a better understanding of your company.
Using data from your balance sheet, you can calculate liquidity and leverage ratios. These financial ratios turn the raw financial data from the balance sheet into information that will help you manage your business and make knowledgeable decisions. A ratio shows the relationship between two numbers. It is defined as the relative size of two quantities expressed as the quotient of one divided by the other.
Financial ratio analysis is important because it is one method loan officers use to evaluate the credit worthiness of potential borrowers. Ratio analysis is a tool to uncover trends in a business as well as allow the comparison between one business and another. In the following section, four financial ratios that can be computed from a balance sheet are examined:.
The current ratio or liquidity ratio is a measure of financial strength. Here is the formula to compute the current ratio:. Of course, the adequacy of a current ratio will depend on the nature of the small business and the character of the current assets and current liabilities. While there is usually little doubt about debts that are due, there can be considerable doubt about the quality of accounts receivable or the cash value of inventory.
A current ratio can be improved by either increasing current assets or decreasing current liabilities. A high current ratio may mean that cash is not being utilized in an optimal way. That is, the cash might better be invested in equipment. Here is the formula for the quick ratio:. The quick ratio is an acid test of whether or not a business can meet its obligations if adverse conditions occur. Generally, quick ratios between. Working capital should always be a positive number. Often, loan agreements specify a level of working capital that the borrower must maintain.
In general, the higher these ratios are, the better for the business and the higher degree of liquidity. It shows how much of a business is owned and how much is owed. Since balance sheets present the health of a company as of one point in time, valuable information will be lost if managers do not take the opportunity to compare the progress and trend of a business by regularly evaluating and comparing balance sheets of past time periods.
Information is power. The information that can be gleaned from the preparation and analysis of a balance sheet is one financial management tool that may mean the difference between success and failure. If not, do you know what adjustments might be made? Allowance for bad debts — Amount of estimated debt to the business that is not expected to be repaid and is subtracted from accounts receivable on the balance sheet.
Also known as an allowance for doubtful accounts. Accounts Payable — Debts of the business, often to suppliers, and generally payable within 30 days. Accounts receivable — An amount owed to the business, usually by one of its customers, as result of the extension of credit. Accrued Payroll taxes — Taxes payable for employee services received, but for which payment has not yet been made.
Current Assets — Cash and other assets readily converted into cash. Includes accounts receivable, inventory, and prepaid expenses. Current Liabilities — The debts of a company which are due and payable within the next 12 months.
Current ratio — Current assets divided by current liabilities. It is a systematic method to allocate the historical cost of the asset over its useful life. Fixed Assets — Also called long-term assets with a relatively long life that are used in the production of goods and services, rather than being for resale.
Conventions, rules, and procedures that define accepted accounting practice. Liquidity — The ability to produce cash from assets in a short period of time. Long-term Liabilities — Debts of a company due after a period of 12 months or longer. All Templates. All Graphics. All Photo. Video Templates. Sound Effects. All Creative. All Backgrounds. All Illustration. All PowerPoint. More similar images See More. Copyright Statement. Watermark Statement. Other Statements. You may like See More.
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Read the complete End User License Agreement here. Balance Sheet Template. Stop and ask yourself if you understand the relationship between assets, liabilities and equity in your business.
Check your answer by completing the balance sheet vertical analysis.
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