Balance sheets: the basics

Do all busi­ness­es need to draw up a balance sheet? No, this is a wide­spread mis­con­cep­tion, because not all en­tre­pre­neurs need to keep complete double entry accounts. What the best ac­count­ing practice for you is depends on a number of factors, like sales or activity field. Here, you will find out what generally needs to be taken into account when it comes to balance sheets, and whether you need to concern yourself with one.

Time can be a scarce resource. Creating a balance sheet is un­for­tu­nate­ly more time consuming than preparing a simple income surplus cal­cu­la­tion. However, at this point it is important to clarify that you are only legally obliged to publish a financial statement if you own a publicly traded company. Financial state­ments consist of a balance sheet, an income statement and, if necessary, an appendix with ex­pla­na­tions. If you are required to prepare financial state­ments, you should draw up two balance sheets per year: an opening one at the start of the fiscal year, which has assets and li­a­bil­i­ties clearly compared, and a final balance sheet at the end of the year. It is important when preparing these to adhere to the United States Generally Accepted Ac­count­ing Prin­ci­ples (US-GAAP) to ensure best practice.

Although preparing balance sheet can be annoying, it does have some ad­van­tages:

Any company operating in the USA with shares available for purchase to the public is required by law to prepare a balance sheet and issue financial state­ments. If a company is privately owned, then they are not required to make this in­for­ma­tion public. The key aspect here is public vs private: it does not matter whether the company is a small business, a large cor­po­ra­tion or a sole pro­pri­etor­ship. If the company is publicly owned, then they must make their financial in­for­ma­tion publicly ac­ces­si­ble. If they are privately owned, then they are not obliged.

Even if you are not the owner of a publicly traded company, it may still be in your interest to prepare and release financial state­ments including balance sheets. Preparing a balance sheet ensures that you have a full, accurate picture of your company’s’ finances at a given time. This can be extremely helpful to business owners who get caught up in the minutiae of day-to-day tasks and perhaps miss the bigger picture. Small business owners in par­tic­u­lar often do not realize that their business is perhaps not as prof­itable overall as they expected, since they are dealing with small trans­ac­tions on a day to day basis. Certain li­a­bil­i­ties and de­pre­ci­at­ing assets, par­tic­u­lar­ly real estate, may create an unhealthy financial situation for your business without you even realizing. Creating a balance sheet is a helpful step in creating accurate, com­pre­hen­sive ac­count­ing records for your company.

Having an up to date balance sheet can help you recognize pri­or­i­ties within your business. A balance sheet will include any out­stand­ing debts owed by or to you, and can remind you to focus on these or any other areas of worry that show up in the balance sheet report. Main­tain­ing a cash flow and keeping debts under control are paramount when running a business. Balance sheets can help you adjust any business practices that aren’t serving your interests fully.

Aside from personal knowledge, creating a balance sheet can be ben­e­fi­cial if you decide to seek external in­vest­ment in your company. Many banks, financial in­cu­ba­tors and private investors want to see a complete overall picture of a company’s finances before putting their own money on the line. They use the in­for­ma­tion provided in a balance sheet to calculate financial ratios and determine whether your company is likely to be prof­itable, as well as whether or not you will be able to repay them. A balance sheet is a good way of providing this in­for­ma­tion, and has become the common standard request for investors.

While it is certainly possible to create your own balance sheet, if you are new to ac­count­ing and running a business, then con­sult­ing a tax pro­fes­sion­al is a good option. Hiring an ac­coun­tant for a one-time job will be far less expensive than the penalties you might face if you publish incorrect financial state­ments.

If you are confident in your skills, then the SBA website has more in­for­ma­tion, and provides sample templates for a balance sheet.

Click here for important legal dis­claimers.