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Starting a business? Your balance sheet could be the most important piece of paper you own

by , 01 April 2014
If you're planning to start a new business, one of the main things you need to understand is the balance sheet. Why? Because the information it explains could literally break or make your business. Continue reading to discover the importance of a balance sheet.

What is a balance sheet?

Investopedia defines a balance sheet as a financial statement that summarises a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

To make sure yours does all this, your balance sheet must follow the following formula...

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Here's a formula for a balance sheet

Assets = Liabilities + Shareholders' equity

This financial statement is called a balance sheet for a reason. And that's because the two sides balance out.

After all your company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders' equity), explains the site.

'Each of the three segments of the balance sheet will have many accounts within it that document the value of each. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt.'

A balance sheet is important because it reveals how financially sound your company is

Experts at the Investors Club say analysts use the balance sheet as an indication of the financial strength of a company.

Essentially, having a healthy balance sheet means investors may be more keen on investing on your company. That's why it's important you understand what it is and how it works.



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