Here are a few terms you’ll want to know when working with balance sheets:
- Balance sheet - The financial statement that presents a snapshot of the company’s financial position as of a particular date in time. It’s called a balance sheet because the things owned by the company (assets) must equal the claims against those assets (liabilities and equity).
- Assets - All the things a company owns in order to successfully run its business, such as cash, buildings, land, tools, equipment, vehicles, and furniture.
- Liabilities - All the debts the company owes, such as bonds, loans, and unpaid bills.
- Equity - All the money invested in the company by its owners. In a small business owned by one person or a group of people, the owner’s equity is shown in a Capital account. In a larger business that’s incorporated, owner’s equity is shown in shares of stock. Another key Equity account is Retained Earnings, which tracks all company profits that have been reinvested in the company rather than paid out to the company’s owners. Small businesses track money paid out to owners in a Drawing account, whereas incorporated businesses dole out money to owners by paying dividends.