One of the financial statements you will run into most likely several times during your career is a balance sheet. The balance sheet reports three things: Assets, Liabilities, and Stockholders’ equity. The ‘basic accounting equation’ essentially governs the whole sheet.

Assets = Liabilities + Stockholders’ equity

Any alterations from the data and we are just looking at an algebra equation. If liabilities go down, then either assets has to go down or stockholders’ equity has to go up. That’s where the statement gets the name ‘Balance Sheet.’

It’s also important to notice that a balance sheet is for a point in time. It’s often called a snapshot of a company’s financial standing. Which is a good way to think of it. You can see where money is at, where it is owned, and where it is owed.

You will have two main sections in your balance sheet. The Assets for the first, and the Liabilities and Stockholders’ equity for the second. Both of these two pieces will equal each other or the SEC and stockholders will get upset at the company and it’s poor accounting.

Now Let’s take a look at the first section, Assets. Assets are defined as anything that your company owns that is worth money. (Notice this isn’t the same definition you will find in Rich Dad Poor Dad!) They are organized from their proximity to cash. Cash comes first, then the asset that is most easily converted to cash. Accounts receivable (people or businesses who owe your company money) are generally next in line, followed by supplies, and then property that you own.

In the next section we see two subsections Liabilities and Stockholders’ Equity.

The money that your company owes to others is called your liabilities. The liabilities are generally put into order by the time period in which they expect to be paid. Everything to be paid within the year are first from highest amount to lowest. Followed by those that will be paid in more than one year, once again from highest to lowest.

We come to the Stockholder’s Equity next. This is the book value of the company’s stock, and not the market’s idea of it’s value. (Which might be a good way to help pick out undervalued stocks if you can find them.)

Let’s take a look at a mockup of a ballance sheet.

You can see that both sides ballance at 200,000 Gazillion Planet Aridni Dollars. The header gives the important information about the type of information and puts it into context. Next, there is the information!

As you develop your business, the need for financial information and tracking will grow.
Where is your money coming from?
Where is your money going?
What areas are the most profitable, and what are losing the most money?

A sole proprietor or partnership needs to take this into consideration in order to make sure they are being as effective as possible. Corporations and other businesses need to be aware of their situation at all times as well.

This is where accounting comes along. The basic financial statements that you should be aware of are:

• Balance Sheet - This Statement shows the breakdown of what your business owns (The Assets) and what it owes (The Liabilities) for a specific point in time.
• Income Statement - This Statement will show how your business performed over a period of time. Your revenues and expenses for the time are displayed here.
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