The balance sheet
The balance sheet is a basic financial document a business should compile once each year.
One of the most basic financial statements a business should produce is a balance sheet. The balance sheet should be produced at least once a year at the end of the fiscal year. The balance sheet provides a snap shot of a business’ assets, liabilities, and its net worth (also known as owner equity).
- An asset is
anything owned by the business. This may include land, buildings, machinery,
equipment, inventory, etc.
- A liability is
any and all obligations that the business or farm owes such as operating,
machinery and land loans.
- Net worth, also
known as owner’s equity, is the difference between assets owned and liabilities
owed. The owner’s equity is the owners’ share of the capital investment. If the
business was to “sell out”, once all of the liabilities (bills) were paid by
the sale of the assets, the owner’s equity is what would be left and split
between the owners.
The balance sheet is used to measure the liquidity and solvency of the business. Solvency is the ability of the business’ assets to cover the liabilities the business has. Liquidity is the ability of the business to raise enough cash when required.
Assets and liabilities are usually broken into three different categories on the balance sheet with the assets being shown on the left side of the statement and the liabilities shown on the right side of the statement. Each asset or liability should be shown within the appropriate category—current, intermediate or long-term.
Current assets are those assets that will be utilized within a single year such as feed, seed, or fertilizer. Intermediate assets are those assets that will have a life from two to 10 years such as equipment like a tractor, truck, or an electric motor. Long-term assets are those items that have an average life span beyond ten years such as land and buildings.
Current liabilities describes loans that are due within the next 12 months such as all accounts payable, operating loan(s), all accrued expenses and the principle due on all of your term debt. Intermediate liabilities are debts that will be paid off in a time period between two and 10 years such as an equipment loan to be paid over a seven-year period of time. A long-term liability is a debt that’s original term more than 10 years such as one for land.
The “Total Assets” are shown in the bottom of the column on the left side of the statement. Below the liabilities section on the right side of the statement a total of all liabilities is shown. Just below the “total liabilities” the 0wners equity/net worth is shown.
There are numerous brands of software that can meet the basic accounting needs of some small farms and businesses. If you are in the market for this kind of software, Michigan State University Extension offers a proprietary system that includes assistance in determining a farm’s financial health for a modest fee. Regardless of the record keeping system you use, if you have any farm management, accounting, or financial related questions please feel free to contact your local Extension office to arrange a discussion with your farm management educator.