The Balance Sheet Made Easy

If you're looking at this page, chances are you have tried to tackle accounting for your small business and did not succeed. You were probably put off by one of the numerous things that are annoying about accounting, from the wording they use, to the over complication of just about everything.

Well it's not that hard so keep the faith. Today I'm going to explain one of the most important accounting reports in English the balance sheet.

The balance sheet is actually very easy once you know what it is, and it becomes almost fun to read. This report can basically be explained with one line.

Assets - Liabilities = shareholders equity

Assets are what you or your company owns.
Liabilities are what you or your company owes.
Shareholders equity is where the terminology starts getting confusing I will get back to that later.

Assets

The assets are pretty much anything that you could sell today if you where really in need of fast cash, (keep in mind assets include Cash). They are arranged on the balance sheet from most liquid to less liquid, so it starts with Cash and works its way down to the less liquid stuff you own such as furniture, etc. As far as Ledgerble is concerned you can rearrange the various elements of the balance sheet the way you want it or prefer it to be displayed, as what is liquid varies greatly from one business to the other.

So to summarize, Assets are basically everything that you or your company owns that's it, nothing more, nothing less.

Liabilities

Liabilities is what you or your company owes. It can be stuff that the company owes you (if you spent from your personal account and are waiting to get the money back) or bills that you still haven't paid. This is also arranged from more liquid to less liquid or since we're talking about things you owe, from most pressing to less pressing. Ideally you would want your liabilities to always be lower than your assets.

Shareholders Equity

That leaves us with the shareholder's equity. which is basically a very fancy term for what the company is worth. To explain this better let's take a very simplistic example of a (service) company that has just been paid $10,000 dollars. The company has no tools, no inventory, nothing apart from this money for that job it just did (could be a street performer).

The company owes $500 dollars for rental of the place where it performed.

In that case the assets are the $10,000 in cash that have just been paid, and the liabilities what is owed is the $500 dollars that still has to be paid to the venue.

The total value of that company as of right now (we're imagining a world without taxes yay) is $9,500 and that is the shareholders equity.

I think kids would understand accounting if it was explained to them the right way.