The balance sheet has three parts: assets, liabilities, and equity. The fundamental equation is simple: Assets = Liabilities + Equity. If that doesn't balance, something is wrong.
Assets
Everything the business owns or is owed: cash, equipment, accounts receivable, inventory, real estate. Current assets (convertible to cash within a year) are listed separately from long-term assets.
Liabilities
Everything the business owes: vendor invoices, loans, credit card balances, tax obligations. Current liabilities (due within a year) are listed separately from long-term debt.
Equity
What's left after subtracting liabilities from assets. For a sole proprietor or single-member LLC, this is essentially the owner's stake in the business. Retained earnings accumulate in equity over time.
Balance sheet vs. P&L
The P&L shows what happened over a period of time. The balance sheet shows where things stand at a moment in time. Both are essential. Most small business owners focus on the P&L and underuse the balance sheet, which means they're missing half the picture.
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