Balance Sheet

Current Assets

Current assets are assets owned by the business that are considered liquid or to be consumed within one year. A liquid asset can be easily converted into cash. Understanding short-term liquidity is essential for small business owners and entrepreneurs. Should the company run into a cash management issue, or have difficulty repaying its obligations, current assets can be liquidated to fulfill those obligations.

Our sample company above would be able to generate $90,550 in cash through liquidation to help cover obligations. The objective is, of course, to not have this happen, but knowing how much is available can foster more responsible risk management and strategic planning.

Examples of current assets include:

• Cash and Cash Equivalents - Cash on hand in checking and savings accounts; cash equivalents are highly liquid, interest-bearing investments such as treasury bills, bank CDs, and money market funds to name a few examples.

• Accounts Receivable - Represents the money owed to the business for goods and services delivered but not yet paid for. This is common in businesses that issue their customers payment terms. An example would be a wholesaler that sells goods to a retailer, giving them 60 days to pay. The value of goods sold would fall in accounts receivable until payment is made.

• Inventory - Raw materials used to produce goods for sale, in-process goods that are partially completed but not yet available for sale, and finished goods that are ready to be sold to customers but haven’t yet.

• Prepaid Expenses - These are expenses paid for services expected to be utilized in the future. An example would be insurance premiums; if a company pays an annual premium of $15,000 at the beginning of the year it’s a prepaid expense and the value of the prepaid expense would be reduced as the year progresses and the service is received until the end of the year when the prepaid expense would be exhausted.

• Marketable Securities - Shares of stock held in public companies that can be sold on stock market exchanges. Since these funds are marketable and easily converted into cash, they’re highly liquid, making them a current asset.

Fixed Assets

Fixed assets - also called Property, Plant, and Equipment (PP&E) - are physical assets used in operating the business but aren’t expected to be converted to cash within the next year. In accrual-based accounting systems, these assets are capitalized and depreciated over the asset’s useful life. Fixed assets are purchased for various reasons including the production of goods, the development of new facilities, rental to third parties, and supply chain integration.

Examples of fixed assets include:

• Buildings - Any buildings owned by a business, a factory for manufacturing, offices, warehouses, etc.

• Computer Equipment - Laptops, servers, and other hardware essential to a company’s technology and information management needs, commonly lasting multiple years.

• Furniture and Fixtures - This consists of common office furniture, chairs, desks, couches, etc.

• Machinery - Refers to machines, tools, and equipment used to facilitate the processing of raw materials into finished goods for sale.

• Company Owned Vehicles - Whether used by employees for business purposes, to make deliveries to customers, or for another use. Vehicles being used for personal use are not considered fixed assets; they would not be reported on the balance sheet.

Intangible Assets

These are other long-term assets owned by the business that are not physical assets. These assets may be indefinite, meaning they’ll exist as long as the business, or definite with a limited useful life. Intangible assets are either purchased (buying an existing brand) or created (developing and patenting a new process).

Intangible assets are important because they represent either a potential legal or competitive advantage for the owner of the property versus their competition.

Examples of intangible assets include:

• Copyrights - Protect original works of published and unpublished authorship, including literary, dramatic, musical, artistic, and other intellectual works, from being utilized for profit by other parties without proper authorization from the owner.

• Goodwill - Represents the amount of money paid for an acquisition above the fair value of the acquired company’s net assets. If Company A acquires Company B for $1,000,000 and the fair value of Company B’s net assets is $750,000, Company A would report $250,000 of Goodwill as an intangible asset on its balance sheet.

• Patents - Exclusive rights granted for an invention, which allows the patent holder to exclude others from utilizing the patented property for a period of time - usually 20 years.

• Trademarks - Recognizable signs, designs, or expressions identified with a business or its products and services. Trademarks can be applied to brand names, slogans, and logos.

• Licenses - Agreements granting the licensee permission to use patented or copyrighted work, trademarks, or proprietary technology owned by the licensor. Licenses can be exclusive (no other companies can utilize that intellectual property) or non-exclusive.

Current Liabilities

Current liabilities are short-term financial obligations owed by the business and due within one year or one operating cycle, whichever is greater. Effectively managing current liabilities is an important part of maintaining liquidity - if current liabilities approach or exceed the value of current assets, the business is at a high risk of being unable to meet its obligations without additional financing.

Examples of current liabilities include:

• Accounts Payable - The opposite of accounts receivable, this is money owed by the business to vendors for goods and services received but not yet paid for. An example would be receiving payment terms on an inventory order that gives the business 30 days to pay. Until paid, the balance is carried as accounts payable.

• Short-Term Loans - Any loans that are due for repayment within the year. This could be a bridge loan for financing operations during seasonally slow periods which is repaid as the business reaches its busy season.

• Accrued Expenses - These expenses have been accrued during normal business operations but not paid. They differ from accounts payable as accrued expenses don’t represent goods and services received, but operational expenses incurred such as wages, utilities, and taxes. For example, if the final pay period of the year stretches into January of the next year, the wages owed to employees for work performed would be recorded as an accrued expense on the last day of the current year.

• Current Portion of Long-Term Debt - This represents the long-term debt coming due in the current year. If a business has a seven-year loan from an equipment purchase, the amount of the loan to be repaid in the current year is considered the current asset portion of the debt.

• Deferred Revenue - Revenue received for goods and services that haven’t been provided yet. This is common in subscription-based companies. If a customer pays for one year of service the payment is classified as deferred revenue and reduced proportionally during the year as the services are rendered.

Other Liabilities

Other (non-current) liabilities consist of long-term loans and obligations the business must repay, but not in the current year. Properly managing these liabilities is vital to the long-term financial health of the business, ensuring there is enough cash to fund growth initiatives that generate a significant enough future return to repay long-term debts.

Examples of other liabilities include:

• Bonds Payable - Bonds are long-term debt instruments used to raise capital. The borrowing business periodically pays interest on the bond until the maturity date at which point the principal amount must be repaid.

• Deferred Tax Liabilities - These are accrued taxes that are not due for payment in the current year. This can happen because of differences in accounting methods used for tax reporting and financial reporting.

• Lease Obligations - The future value of lease payments that the business has agreed to are recorded on the balance sheet as a liability.

• Lont-Term Loans - The most common non-current liability which represents the principal balance of any loans from banks or other institutions that are not due in the current year.

Owner’s Equity (Shareholder’s Equity)

Owner’s Equity (OE), also called shareholder’s equity details how much of the business is financed by capital investments from ownership and retained earnings. OE becomes a critical component for evaluation when attempting to secure financing - either loans or additional equity investments.

Owner’s Equity = Total Assets - Total Liabilities

Depending on the structure and nature of the business, owner’s equity can consist of various components, including:

• Capital Investments - This may be listed as Paid-In Capital, it is cash and other asset contributions received from the business owners. This number would include the initial start-up investments and any subsequent equity funding rounds the company received.

• Drawing Account - In sole proprietorships and partnerships, owners may withdraw funds from the business. These capital withdrawals are captured in the owner’s drawing account and subtracted from the rest of the Owner’s Equity.

• Retained Earnings - These are the accumulated profits the business has generated during its lifetime that have been retained and reinvested into the business rather than paid out to owners in the form of dividends.

• Stock - Corporations will list common and preferred shares of stock in the Owner’s Equity portion of the balance sheet.