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CompTIA Quick Start Guide to Understanding Your Balance Sheet

What is a Balance Sheet?

For many companies the balance sheet is just a tracking report. It shows the current dollar value of what the company has and what it owes. Others view it as the summary of resources available for running the company. Others see it as the companion to the profit and loss statement (P&L) that is used to keep all accounting records in balance. All of this is true, but there is actually much more to know about a balance sheet.

The balance sheet is, in essence, a cumulative score sheet for the life of the company. As profits (or losses) are generated in the P&L, they flow into the equity section of the balance sheet, so the P&L is a feeder report to the balance sheet. Money coming into the company is tracked as an asset, and money spent to pay expenses is pulled out of assets and flows to the P&L to pay expenses. You could think of a monthly P&L as the score for one inning in a baseball game, and the annual P&L as the score for a whole game. The balance sheet is the cumulative win-loss record for the team since it was founded.

There are many transactions that occur on the balance sheet that do not involve the P&L. For example, borrowing money on a bank line of credit results in an increase in liabilities and an increase in cash. This is a very important part of understanding what is happening in the business, but this will only show up on the balance sheet. While the P&L is a very important part of the big picture, the balance sheet tells a much more complete story.

The things you do to make your balance sheet stronger will make your business stronger and more successful. The purpose of this guide is to summarize balance sheet basics and highlight the ways you can intentionally manage your balance sheet to build a more successful company.

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