Balance Sheet

The Balance Sheet is a snapshot of a business at a particular point in time. It shows a business's assets (what the business owns), liabilities (what the business owes), and owner's equity (what the owner is worth). A new business gets its first Balance sheet when the business starts. It is updated annually thereafter, usually at year's end. The Balance Sheet shows the business's financial status and stability, and if the owner's equity is increasing. It consists of two parts: Assets and Liabilities and Owner's Equity. The total of one part equals the total of the other part:

Total Assets - Total Liabilities = Owner's Equity 
o r
Total Liabilities + Equity = Total Assets
o r
Total Assets - Equity = Total Liabilities

For many home-based, service businesses, or businesses where the owner has no credit rating separating personal and business assets and liabilities is difficult. When this is the case, a personal financial statement may be used in lieu of the balance sheet or the balance sheet should reflect personal assets, liabilities, and owner's equity mixed with those of the business.

Figure 12: Balance Sheet

Chapter 6 Business Plan Study Guide: Balance Sheet

1. A balance sheet is created for a new business when it (opens/has operated for 6 months).
   
   
2. Subsequent balance sheets are created at (the beginning/the end) of each subsequent year.
   
   
3. The Balance Sheet shows a business's 
   a.  Financial status
   b.  Stability
   c.  Expense to equity ratio
   d.  Ratio of expenses to income
   e.  All of the above
   f.  a, c, and d only
   g.  a, b, and c only
   h.  a and b only
   
   
4. It is OK to combine personal assets and liabilities with the business's assets and liabilities on the Balance Sheet. T_____ F_____ 
   
   

Study Guide Answers: Chapter 6: Balance Sheet

© July 1998, 1st Revision June 1999, 2nd Revision February 2001