| One of the fundamental financial statements of a | | | | receivable, that is, amounts your customers owe |
| business is called the balance sheet. In layman's | | | | you but have not yet paid. That is an asset, |
| terms, what are the different components of the | | | | because some day that cash will be realized. |
| balance sheet? | | | | Another type of intangible is a prepaid expense. It |
| The nature of the balance sheet is that it is similar | | | | may be required for you to take out a 3-year |
| to a financial picture of the organization at a | | | | insurance policy, paid upfront. You've already paid |
| certain point of time (as opposed to an income | | | | for this service but have not yet received the |
| statement which is over a period of time). For | | | | benefit of insurance coverage for the entire |
| example, the balance sheet can be as of | | | | three-year period and in the meantime that is |
| December 31, 2006, or whatever is the close of | | | | considered an asset. |
| the fiscal year. Balance sheets can be determined | | | | Debts are also known as liabilities. In addition to |
| monthly or at other intervals as well. Balance | | | | owing money to banks, your business could own |
| sheets contain "permanent" information, as | | | | money to suppliers. This is called accounts payable. |
| opposed to "temporary" information on an income | | | | A more formalized statement of something owed |
| statement. For example, cash is a permanent | | | | is called notes payable. Money owed on a |
| account, that is, an ongoing part of the business. | | | | mortgage is called mortgage payable. Payables |
| Revenues (sales) and expenses are temporary | | | | that are due within one year are called current |
| accounts, determined for specific fiscal years and | | | | payables; payables that are due longer than one |
| then those accounts are closed out to the balance | | | | year are called long-term payables. |
| sheet. | | | | Owner's equity (or capital) can be explained in |
| The balance sheet equation is assets equal debts | | | | terms of your home mortgage. Your house is the |
| plus owner's equity. An asset is some type of | | | | asset and how much you owe the bank is the |
| property you need in your business. Cash, real | | | | liability. What is left is the owner's equity. This logic |
| estate, equipment, vehicles, inventory and the like | | | | can be applied to your assets in total; subtract |
| are required to run a business. There are claims | | | | what is owed to the bank and the result is |
| on this property: who owns what and that | | | | owner's equity. There are different types of |
| comprises the debt and owner's equity sections. | | | | owners, depending on business types. A sole |
| Debt is how much the bank (and other creditors) | | | | proprietorship is a single owner, as contrasted |
| owns of your assets and owner's equity is how | | | | with a partnership where there is more than one |
| much you own. So the grand total of the | | | | owner. If a business is incorporated, this section is |
| property (assets) will equal the claims of the bank | | | | referred to as stockholder's equity and common |
| and the claims of the owner. | | | | stock will be involved. |
| Now that we've defined the basic components of | | | | In summary we've looked at the balance sheet |
| the balance sheet, let's look at each section in a | | | | complete with the goods a business has (the |
| little more detail, starting with assets. We've given | | | | assets). Claims by others on those goods are |
| some tangible examples of what assets can be, | | | | considered to be liabilities and the net result is |
| but they can be intangible (not physical) as well. | | | | owner's equity. That is why the balance sheet |
| An example of an intangible asset is accounts | | | | balances. Assets equal liabilities plus owner's equity. |