1. Balance Sheet.

The financial position of a company is reflected in the balance sheet. The balance sheet provides a periodic view of the organization's assets, liabilities, and owner's equity. Inventory accounts represented on the balance sheet include three separate inventory classifications: raw materials, work in process, and finished goods. The information included in the balance sheet, including specific inventory classifications, can be broken down to more specific products, asset categories, business divisions, even specific equipment categories and processes to provide greater insight into performance and progress of the many different operational areas.

A balance sheet is made up of three parts.

Assets: Things a business owns

Liabilities: Debts a business owes

Equity: The owners’ investment and re-investment in the business

Everything that the business owns (its assets) must be paid for; free of debt owing.

Therefore we get the following formula:

Assets = Liabilities + Equity

The purpose of the balance sheet is to give a snapshot of what the business owes and owns at a certain point in time. At the top of the statement will be an "As of..." date. This is the date (usually the business's year end) that the balance sheet reflects.

One important note is how your balance sheet is valued. All of your financial statements are (with few exceptions) valued at the cost that you made the original transaction at. For example, if the company purchased the building you operate in for $50,000 ten years ago and it is now worth $150,000, it will appear on the balance sheet at its original $50,000 cost minus depreciation.

Assets

You need to make three lists. The first list is your list of Current Assets. These are assets (things your business owns) which will be used up within the first year of doing business. Typically they include cash, inventory and pre-paid expenses (such as pre-paid insurance). Although Accounts Receivable is another example of a current asset, there are no accounts receivables in a business start-up.

The second list is the Capital Assets. These are items you purchase with the intention of keeping them and using them to run the business. For example, if you purchase a vehicle to use in the business, it is a capital asset. If you purchase a vehicle to re-sell it, however, then that vehicle is inventory.

Sometimes there is a third asset list. These are known as Intangible Assets and are things such as franchise fees, goodwill, quotas, licenses, patents and trademarks.

Liabilities and Equity

All changes occurring within a specific reporting period are shown on the statement of owner's equity. Equity increases from investment and income, and decreases from withdrawals and losses as they relate to the owners or shareholders of the company and are communicated in this financial statement. Information relative to the income or increase in value as experienced on the ownership level is essential to ensuring future funding and investment opportunity.

The balance sheet is not a good indicator of the value of business, only the historical transactions. There is great debate in the accounting community about whether historical cost is the correct valuation method (proponents suggest that it is, at least, the most objective method), but for our purposes here, it is sufficient to note that it is historical cost that appears on your financials.