The Importance of the Balance Sheet

The Importance of the Balance Sheet

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Wanna know the very first thing I look at when login to the Quickbooks account of a new or potential client?

I’ll give you a hint – it’s typically neglected, and it instantly tells me what types of issues I might uncover as I dig in a little more…

If you said the balance sheet, then “ding ding ding” you’re a winner!

All business owners know what an income statement, or a P&L is – it records all the income & expenses of the business.

But what’s the balance sheet for? That’s what we’re going to dive into today!

We’ll break down why the balance sheet is often overlooked, but why it’s as equally important as your P&L. So, grab your favorite beverage, cozy up, and let’s get started!

The Importance of the Balance Sheet

What’s On the Balance Sheet?

The balance sheet is divided into 3 main sections: Assets, Liabilities and Equity.

A quick refresher: Assets are things you own, liabilities are things you owe, and the equity reflects your personal stake or investment in the business. (If you need a more thorough review, check out the post “Understanding the Chart of Accounts for Retail Businesses”)

The balance sheet is going to list out all of these types of accounts in your chart of accounts, along with the balances in each of them as of a certain point in time. It’s like a snapshot of the financial health of your business as of a certain date.

An Important Note: Not Everything Affects the Income Statement

Like I said before, everyone is at least somewhat familiar with the purpose of the income statement. But, did you know that not all the transactions in your business affect the income statement? Here are a few examples of transactions that only affect your balance sheet:

 

Transferring money from your business checking to your personal checking – This is decreasing your assets, while also decreasing your equity, or investment, in the business

 

Making your sales tax payment to the state – This is using an asset to pay for a liability

 

Making a payment towards a credit card – Again, using an asset to pay for a liability

 

Buying inventory – Trading one type of asset for another type of asset

 

If a balance sheet has assets or liabilities with a negative balance, that is a big indicator that things are being recorded incorrectly. Every number on the balance sheet should be able to be verified against some type of document – a bank statement, credit card statement, point of sale report, loan document, etc… 

Why Does the Balance Sheet Matter?

Your balance sheet is a critical document when you’re in need of financing, like applying for a business loan. Lenders want to see the big picture of your financial health, not just your profits. They want to see that you have a healthy foundation, and that you don’t already owe more than you can handle. They want to make sure their investment in your business is well protected.

Certain business types (S Corps and Partnerships) even need to include a balance sheet with their annual income tax return. Often times, tax preparers will just make the necessary adjusting entries in Quickbooks to “correct” balances so they match the statements & reports they should, but this doesn’t necessarily catch any bookkeeping mistakes that CAUSED those errors throughout the year.

But even just for yourself, you want to keep tabs on the balance sheet for your own business to make sure you’re growing as a business. If you use a bookkeeping software like Quickbooks, it is easy to run a Balance Sheet report as of any day you choose. You can easily run it as of 12/31 for each year you’ve been in business and see how your business has (hopefully) grown over time.

Understanding and maintaining your balance sheet might seem like a daunting task, but it’s an essential skill for any business owner. 

It provides insights into your financial health, helping you make informed decisions and impress potential lenders. Don’t neglect this powerful tool in your business toolkit – embrace it, and watch your business grow!

Here’s to finding your own version of freedom,

Hi, I'm Megan!

Bookkeeping for the retail industry has some unique complexities that take extra time to manage to ensure accuracy. At Finding Freedom Financial Services, I provide done-for-you bookkeeping services for boutique owners that accurately track these complexities for you so you can have more time and focused energy to dedicate to running your stores. If you’re ready to get your time back, apply to work with me today!

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