In the last two posts, Understanding Assets on the Balance Sheet and Understanding Liabilities and Equity on the Balance Sheet, I explained the different types of accounts that appear on the Balance Sheet. This report shows the health of the business at a single point in time. For instance, if you want to know the balances as of today, you’d put that as the date, and if you want to review as of last year you’d use 12/31/13.
Both sides must balance (Assets = Liability + Equity). A company pays for the assets through either borrowing money (liabilities) or investing (equity).
These accounts can be affected in different ways. For instance, your assets will increase or decrease with each transaction appearing in the checking account (deposits increase and payments decrease value). So a client invoice will increase your accounts receivable (and asset value) and purchasing products on credit will increase your accounts payable (liabilities).
Let’s see how the balance sheet values are affected. A customer makes a purchase of $100 on credit and pays the invoice at a later time. The cost of the item is $50. Another item is purchased on credit to replace the one sold, and the bill is paid at a later date.
Accounts Receivable: + $100 Inventory Asset: – $50
Accounts Receivable: – $100 Checking Account: + $100
Inventory: + $100 Accounts Payable: + $50
Accounts Payable: – $50 Checking Account: – $50
Depending on when these transactions occur, the values of these accounts can be different on subsequent dates. For instance, if the original sale happens on December 31, but the invoice is paid January 2, the value of Accounts Receivable will be $100 more the end of the year than it will be two days later. This is why the balance sheet is based on a specific date.
If you have trouble understanding this report, schedule an appointment with us to discuss the values and the impact on your business.
