QuickBooks 2011: The Missing Manual

The Balance Sheet

If a Profit & Loss report is like a video, a balance sheet is more like a portrait. This report shows how much your company owns (assets), how much it owes (liabilities), and the resulting equity in the company at a given point in time. While a Profit & Loss report tells you whether you’re making money, the balance sheet (Reports→Company & Financial→Balance Sheet Standard) helps you analyze your company’s financial strength.

Understanding the Balance Sheet

One thing you can count on with a balance sheet is that there’s a steady relationship between the total assets, total liabilities, and equity, as you can see in Figure 17-6. The Balance Sheet report earns its name from math, not magic; here’s the formula that puts the “balance” into balance sheets:

Assets – Liabilities = Equity

As you buy more or borrow more, the value of your equity changes to make up the difference between the value of your assets and liabilities. Another way to look at this equation is that your asset value equals the sum of your liabilities and equity.

Figure 17-6. The key to a good-looking balance sheet is not having too much debt. How much is too much? It depends on the industry you’re in, but the acid test is if you closed up shop today and sold all your assets, would you have enough money to pay off your liabilities? If the answer is no, you’ll have a hard time finding a bank willing to loan ...