The Balance Sheet
Sort what the business owns, owes, and keeps, on one date.
In your head, jot if needed · no calculator why?
Opens at level 20. You're level 1. You can read and practice here now.
the idea
The balance sheet is a snapshot on one date: what the business owns (assets), what it owes (liabilities), and the owners' claim (equity). Revenue and expenses belong on the P&L, which covers a stretch of time.
A few items surprise people. A customer deposit for work not yet done is a liability, because you owe the work. Sales tax you collected is owed to the government. Insurance paid in advance is an asset until it is used.
Assets and liabilities also split by time. Current items turn into cash, get used up, or come due within a year; long-term items last longer.
techniques
Owned, owed, or the owners' claim
- Owned, including money customers owe and things paid in advance: asset.
- Owed, including work you owe customers and tax you collected: liability.
- Owner's capital and profits kept in the business: equity.
- A period's revenue or expense: P&L, not the balance sheet.
worked example
A bike shop lists cash $4,000, inventory $6,000, accounts payable $2,500, equipment $3,000, and a loan payable of $5,000. What are total assets?
- Assets: cash, inventory and equipment.
- $4,000 + $6,000 + $3,000 = $13,000.
Answer: $13,000
Working capital: subtract
- Subtract current liabilities from current assets.
- If liabilities are bigger, the answer is negative.
- Dividing instead gives the current ratio, a different number.
worked example
A food truck has $12,000 of current assets and $8,500 of current liabilities. What is its working capital?
- $12,000 − $8,500 = $3,500.
Answer: $3,500
watch out for
- Calling customer deposits revenue. Until the work is done, you owe it.
- Counting a loan in total assets because it came with cash. The cash is the asset; the loan is owed.
- Calling a van current because it is used every day. How long it lasts decides, not how often it is used.
practice
Asset, liability, or equity?
worked example
Equipment the business owns and uses. Where does this belong?
- Liability
- Asset
- Not on the balance sheet (a P&L item)
- Equity
Answer: Asset
- Equipment: an asset (something the business owns).
- Assets are things owned, liabilities are amounts owed (including work you owe customers), and equity is the owners' claim. Revenue and expenses live on the P&L.
Add up the assets
worked example
This month's revenue $3,250; wages payable $700; accounts receivable $4,450; equipment $27,850; loan payable $19,900. What are total assets?
Answer: $32,300.00
- Add only the assets: $4,450 + $27,850 = $32,300.
- Leave out this month's revenue (a P&L item), wages payable (a liability) and loan payable (a liability).
Current or long-term?
worked example
The part of a loan's principal due after the next 12 months. How is it classified on the balance sheet? (Current means within one year.)
- Current asset
- Long-term asset
- Current liability
- Long-term liability
Answer: Long-term liability
- This is a long-term liability.
- Current items are expected to be turned into cash, used up, or paid within a year; long-term items last longer than that.
Working capital
worked example
Current assets are $88,500 and current liabilities are $37,000. What is working capital? (Use a minus sign if negative.)
Answer: $51,500.00
- Working capital = current assets − current liabilities = $88,500 − $37,000 = $51,500.
- It's a snapshot, not a promise that the cash is available tomorrow.