The financial statements allow a business to stop in time and take a snapshot of how well the company’s performing. These reports of a company’s performance are usually completed within a few days after the end of each month. Each financial report shows different aspects of the company’s operations. Together, these three important statements help the entrepreneur make important decisions for the financial health of the business.
The Balance Sheet and Net Worth
The balance sheet is the financial statement that reports the company’s net worth or owner’s equity. For larger public companies it also shows stockholder equity. The balance sheet is divided into two sections and each section must balance. The first section shows the business assets and the second section shows the liabilities and owner’s equity. The following formula is a simplistic example of what makes up the balance sheet.
Assets – Liabilities = Owner’s Equity
As assets increase, owner’s equity increases. If liabilities increase, owner’s equity will naturally decrease. If liabilities were incurred for the purchase of assets, then owner’s equity is not affected. When a business is first created, the amount of the owner’s personal investment is listed as equal monetary portions for assets and owner’ s equity. The investment of assets can vary depending on the business. Some asset examples might include:
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