Personal Balance Sheet
Why Small Businesses Are Different If you are a small business owner or entrepreneur then you need to be able to read and understand your balance sheet because first it is through your financial statements and other numerical data that you collect that you really get to know your business. Michael Gerber the best selling author of the E-Myth Revisited says it much better than I ever could as "because without the numbers you can t possibly know where you are let alone where you re going. With the numbers your business will take on a totally new meaning. It will come alive with possibility." The very first step you will ever take down that road to really knowing your business is through examining and understanding your own balance sheet.
There are many forms of debt. There is secured debt. That means that the debt is secured by a lien against an asset that you own. The lien and the debt should be for less than the resale value of the asset. Unsecured debt does not have any such lien and is hopefully based on your capacity to service the debt. The problem with unsecured debt like credit cards is that it is not offset by some asset that you own and acts only to reduce the net worth on your balance sheet. Credit card debt would thus be categorized as bad debt as it only acts as a drag on building positive net worth.
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Non-current assets therefore contains all resources owned by the company that have a useful life of more than one year. These assets are often referred to as Capital Assets which include equipment buildings and land. Notice that all assets mentioned thus far whether current or non-current can be classified as Tangible Assets which contain physical substance. However the balance sheet also presents Intangible Assets which are reported as non-current capital assets as well since they have a useful life of more than one year but do not have any physical substance such as goodwill and patents. The sum of the current and non-current assets will equate to and be reported on the balance sheet as Total Assets of the company. Liabilities: represents the claims against the company s assets that have not been paid at the balance sheet date. Therefore they are obligations to the company s creditors.
It reports the balances of all assets liabilities and equity accounts for the company. It is critical to understand the fundamental accounting equation in the preparation and presentation of the balance sheet where Assets = Liabilities + Equity. Assets: contains all resources that the company owns at the balance sheet date. This includes both current and non-current assets that the company utilizes in order to generate future economic benefits. The most common current assets listed on the balance sheet includes cash accounts receivable and inventory which are resources that are anticipated by management to be converted into cash within a year or the entity s operating cycle whichever is longer. Accounts receivable is simply the amount of money owed to the company by its customers which is generated from the sale of goods and services on account.