Start Up Accounting – Creating A Balance Sheet
By C. Worrall
Having started with the income statement yesterday, I might as well continue on with the balance sheet. The balance sheet is divided into two sections, the assets and the liabilities and stockholders equity. This may sound like three sections (and it is), but the point of it being thought of as two sections is illustrated
in the following equation:
Assets = Liabilities + Stockholders Equity
Assets being what you have, liabilities being what you owe, and stockholders equity being what you own.
- Current assets: Assets that are expected to be turned into cash within the next year, including
- Cash (and cash equivalents)
- Accounts Receivable
- Prepaid Assets
- Other assets include
- Net property plant and equipment (the full cost of your PPE minus accumulated depreciation)
- Other long-term assets, such as deposits, prepaid multi-year licenses, etc.
You total all of these numbers to get your asset total number.
Current liabilities: Liabilities that are expected to be paid within the next year, including
- Accounts payable
- Wages and related costs payable
- Current portion of long term debt (the part of your multi-year loan you expect to pay this year)
- Other current payables
- Long-term debt
- Deferred tax liabilities
- Other long-term obligations
This is your total liabilities.
The equity is the outstanding shares times the par value plus the paid-in capital.
|In general, this is sort of an anachronism, but when you issue shares you place a par value on them, often $0.01. If you issue 100,000 shares, your par value is $1,000. Let’s say you invested $30,000 in your company. Your common stock line would say $1,000 and|
your paid-in capital line would say $29,000.
The next line is retained earnings. This is how much your company has retained from the earnings after paying out expenses and dividends.
Add these items together to get your stockholders’ equity.
Add the stockholders’ equity and the liabilities together and it should equal the total assets. If it does not, then there is an error. Never ever hand a venture capitalist or banker a balance sheet that doesn’t balance. That will peg you in a second as someone who has no clue about finances.
For an Excel example of the financial statements working together, view my article on Building A Cash Flow Statement
Ms. Worrall is the President of Worrall Consulting, LLC. Worrall Consulting is a finance and business strategy consultancy providing professional services to high growth, early stage companies. The company provides capital formation assistance, market research and business intelligence, and business planning strategy. More information about the company can be found at http://www.worrallconsulting.com Additional financial and strategy advice can be found at http://www.cfoyourself.com
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