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Decoding Accounting Terms - The Balance Sheet

Posted by Mike Nguyen on August 3, 2017 at 8:46 AM

Introducing, Mike Nguyen. He’s the newest member of our Customer Success team here at Kashoo. Mike is currently working on his Bachelor’s in accounting and once he has that, he will be diving right into getting his CPA designation. He tells people he likes numbers but he’s really in it for the money. We're excited to have him onboard!

As an accounting student, I work with accounting terms on a daily basis. Honestly, they can be a real drag. Sometimes their meaning isn't really clear, so it's easy to get confused. Then, if you combine those terms with trying to decode what's in a financial report, you've got a recipe for frustration, especially if you're not an accountant.

Now, I’ll be honest, I’m not a math whiz, I’m actually far from it. Let’s just say in high school my only “A” was in gym class. Yeah, I was that type of student. As cliché as it sounds, when it comes to accounting, if I can do it, anyone can. Accounting isn't rocket science or brain surgery.

Accounting terms decoded for small business owners.

First off, accounting is basically just adding and subtracting numbers, not some secret code that only accountants understand. Those numbers are your "Debits" (Subtracting, Liabilities, money going out, things you owe) and "Credits" (Adding, Assets, money coming in, the money you're owed). There’s no long division or finding the area of an isosceles triangle, and there won't be a test.

A quick way to see exactly what you have and what you owe at-a-glance is to create a Balance Sheet. Let’s break down the parts of the balance sheet so you can understand what it is, what the terms ACTUALLY mean, and why it matters to you.

Simple balance sheet for small business owners.

Term 1 - Assets

We’re going to start with the simple stuff, Assets. Assets are things you own. We could break down into two types, Current Assets, and Fixed Assets. Current assets are things like cash, inventory, and accounts receivable (money you need to collect from clients). Fixed assets are considered long term, like land you own or large operating equipment. An easy way to look at it is, whatever you can turn into cash is an asset.

Term 2 - Liabilities

Next up, we’ll be talking about Liabilities. Just like assets, there are two types of liabilities, Current Liabilities, and Long-term Liabilities. Current liabilities would be accounts payable (money you owe to a supplier), or a short-term loan that is paid off within a year. Long-term liabilities are debts that will take longer than a year to pay off such as a mortgage for your business space. Remember when I said accounting is basically adding and subtracting numbers? Well, if you take your assets and subtract your liabilities, that gives you Owner’s Equity.

Term 3 - Equity

When I say owner’s equity, I’m referring to the money you put into your business. You may also hear the term Shareholder’s Equity, that’s used for larger companies that have shareholders. If you take your assets, liabilities and owner’s equity (A = L + OE) and put them down on paper, that would essentially be a Balance Sheet, which is a financial statement that gives you a quick at-a-glance view of the health of your business.

Here’s an example of some clues that you have a healthy business when you take a look at your balance sheet. If you see your accounts receivable (asset) going up, that tells you your business is working. People owe you for the work you’re doing. More importantly, if you see your accounts receivable going down, and at the same time your cash in the bank going up, that means you’re collecting money owed to you. Even better? Another positive sign is when your liabilities are lower than your assets. That means you’re keeping more of the money you make in your business.

Why does this even matter?

As a small business owner, you might be asking yourself “why is a balance sheet important when it comes to owning a business?” Well, a balance sheet can tell you the financial state of your business at any given time. Also, it’s a great tool to have if you’re trying to apply for a loan with the bank, just bring in your balance sheet for the bank to analyze, and presto, loan approved.

One little piece of advice before I leave you to it. For a balance sheet to really do its job, MAKE SURE all the numbers are accurate. Reason being, if you add up your liabilities and owner’s equity, that number SHOULD be equal to your assets.

Luckily for you, Kashoo is a fully featured, double-entry accounting software that can handle all of that for you so you have nothing to worry about! You can sign up for free and create a balance sheet today. You can also check out KashooU for some quick, intuitive accounting help for small business owners.

Sign up for a 14-Day Free Trial of Kashoo.

Topics: Accounting Basics, Kashoo Accounting