Hi, I am Nayo Carter Gray, owner and founder of First Step Accounting,
where we make accounting
a little less taxing for small business owners just like you.
I'm partnering with QuickBooks
on a video series to help you run and grow your business.
Today, we're going to cover everything you need to know about balance sheets.
Today, we're going to talk about
one of my favorite financial statements, the balance sheet.
I like to look at it as if it's your business's report card,
because it tells you specifically how your business is performing
and if you can meet your financial obligations.
So in this video, we're going to discuss exactly
what a balance sheet is and how you can use it.
But before we continue, make sure you hit that like button and subscribe
to the Quick Books Channel, especially if you find this video helpful.
Oh, and if you're a reader like me, you can check down in the description
for a link to an article below.
A balance sheet is a financial statement
that lists your business's assets, liabilities and equity.
It shows your business's financial position at any specific point in time.
Some businesses are legally required to run a balance sheet.
Businesses such as corporations and partnerships,
and they can be run on a monthly, quarterly or annual basis.
It's useful to refer to them throughout the year to make important
management decisions.
Great, we're getting into the meat of potatoes, this is my favorite part.
The three items that make up a balance
sheet are your assets, your liabilities and your equity.
Now, what are assets?
Assets are the items in your business that can be easily converted to cash.
So think about your bank and checking accounts as well as your inventory
and some securities.
Then we have your liabilities.
These are the debts you owe to others.
So think about any mortgage notes, credit cards or accounts payable.
And then lastly, we have the equity.
This is the owners of the business value in the business.
So it does include initial investments
and it also includes any accumulated profits
or losses that the business has encountered over time.
Assets fall into several categories.
Three of the main ones are liquid versus non liquid,
tangible versus intangible.
And operating versus nonoperating.
Let's dive a little deeper.
Liquid versus non liquid
liquid assets are those that can be easily converted to cash.
So think things like your bank accounts or your inventory that can be easily sold
and converted into cold, hard dollars,
versus your non-liquid,
which are things like major assets that take a little bit longer to sell.
So think buildings or land, tangible versus intangible, tangible
assets are things you can really kind of put your fingers on.
So think about your inventory.
How many of these what that we need to sell again, your real estate,
things that you can physically see now are
intangible assets are really the intellectual property.
So think about your patents,
your trademarks, your goodwill, things that hold future value.
Lastly, operating versus not operating, operating
assets are the assets that you use more in the day to day
basis versus the nonoperating, which
still hold economic value and earn you some residual income.
But you may not necessarily need them to run the day to day operations.
A company's liabilities
can fall into two main categories, current or non-current.
Current liabilities are those that are typically due in a year or less.
So think short term debts
like credit card payments or wages that may be due in a couple of weeks.
Longer term debts or our noncurrent liabilities are generally due over
three hundred and sixty five days or more and are mostly tied to your major assets.
So think mortgage notes, loans payable and long term pension benefits.
The balance sheet gives you a clear picture
on what your business owns and oh, there are several ways
you can use a balance sheet, one to determine the business's net worth.
This will be especially important
if you decide to bring one investors or sell the business.
Next, it'll be helpful to apply for credit.
Lenders will want to understand
if you have the ability to meet your financial obligations.
And lastly, it'll be super helpful to use your balance sheet
to prepare your tax return.
First, you need to determine the dates of your balance sheet.
Like I mentioned earlier, generally we run these monthly, quarterly or annually.
Next, you need to add your assets.
Don't forget to add your liquid and non liquid assets together.
Then you want to calculate your liabilities.
You want to total up your current
and your noncurrent liabilities and then add them together.
Next step you want to add in your equity.
This includes any initial investments in the business,
plus any accumulated profits or losses over the lifespan of the business.
Then you want to add your liabilities and your equities together.
Now we want to know what makes the balance sheet balanced?
Compare your assets to the value of your liabilities and equities together.
And guess what? They should be in perfect harmony and balance.
If they match, then that means you completed a balance sheet correctly.
Let's celebrate.
If you want a step by step tutorial,
check out this video on creating a balance sheet.
It's important to use balance sheets periodically
to keep your business's finances in check.
You can also easily create a balance sheet using QuickBooks online.
It takes your financial data and accurately creates
a balance sheet crunching the numbers so you don't have to.
I hope you enjoyed this video.
Don't forget to like and subscribe to the
QuickBooks Channel for more video content just like this.