Make Sure Your Compensation Plans Are In Order And Documented

22. April 2019 13:43 by Jason Kelley in

I recently finished resolving a dispute between a client and the IRS regarding the amount of compensation for the founder and owner of a corporation. While the amount of compensation during one of the years at issues was probably unjustifiably high if viewed by itself, the person's compensation over the years (and including the year in dispute) was readily justifiable when viewed over the entire period that the person worked for the business. We ended up resolving the dispute and the resolution was within $50,000 in compensation from my initial evaluation of the case. But it was an expensive "victory" for the client.

The strongest point for the IRS, and the reason it took as much time and expense to resolve, was the client’s lack of documentation of a consistently applied compensation plan. The client had annual minutes (which many clients do not), but those minutes did not address how the owner’s compensation was determined. The client also did not have a written employment agreement, nor did they have any written (or “understood”) basis for calculating the client’s incentive compensation each year. This lack of a consciously determined pattern to the compensation ended up costing the client several thousand dollars in attorneys fees, and a like amount in additional taxes.

The moral of the story: properly pay and report compensation to employee/owners as such; have a written employment agreement or at least some sort of documentation in your minutes of the oral arrangements for compensation; make sure you have a documented or easily proved method for determining incentive compensation that is reasonable in amount.

Share or bookmark this post
  • Facebook
  • Google
  • LinkedIn
  • TwitThis

A Real Life Asset Protection FAILURE

13. April 2019 12:37 by Junita Jackson in

 

Successful business owners and doctors face many different kinds of risks. The following real story* illustrates significant exposures in one physician’s planning.

 

Failure to Adequately Insure and Implement Legal Planning

I was personally involved in this case earlier this year as an anti-fraud consultant.  A doctor’s husband was at fault in a car-pedestrian accident and struck and seriously injured someone walking their dog in the neighborhood and the medical bills and other economic losses incurred by the victim quickly exceeded $500,000, the limits of the doctor’s automobile liability insurance policy. Sadly, the defendant couple had been insured for a greater amount the year before and had canceled their $1 million umbrella policy, presumably to save $400 a year.

Their insurance carrier quickly agreed to pay the limits of their policy and when they realized they’d be personally liable for medical bills, pain, and suffering and other claims, the physician and her spouse went on a “fraudulent transfer” fire drill. They set up an LLC for the office building held in their own names, quit claimed the condo they had purchased for their son to use while in college to him, tried to equity strip their home and incorrectly claimed that the $900,000 vacation home they held as “tenants in common” in another state was unavailable to their creditors. All these moves (except keeping a full equity vacation home in your own name) would have been reasonable, prudent and fully legal if they had been properly done in advance of any problem. In this case, not only were their 11th hour moves ineffective against the existing exposure, they created additional jeopardy in the form of civil and even criminal penalties up to the level of a felony for engaging in conduct designed to delay, hinder or defraud a known creditor. Once the facts were explained to them and the legal counsel advising them on this issue at pre-trial mediation, they quickly wrote a check for $550,000 from their retirement savings to add to the policy limits of their insurance policy and wisely settled the case to avoid very significant additional liability in both the form of an award and in the required costs of defense, which would have easily been six figures.

Important Planning Lessons:

Act Today.

We’ve previously discussed that asset protection and risk management are always proactive and the single biggest mistake that doctors make in their own asset protection planning is doing nothing. You cannot plan against a pre-existing exposure or manage risk after a problem, you can only manage crisis, which is always more dangerous and expensive. Doing so is not only legally ineffective, it is illegal, can create additional civil and criminal penalty risk and even deprive you of your rights to other remedies, like bankruptcy.

Insure Until It Hurts

I’ve previously provided an article on why umbrella policies are vital basic asset protection for everyone, as well as a separate discussion on why umbrella policies on their own are insufficient protection. Insurance, perhaps after compliance and following best practices in all areas, is the first and most predictable and effective line of defense. As mentioned above a specific incident can create multiple exposures including both the award itself and the legal fees required to obtain adequate legal representation. A $1 million personal liability umbrella policy is the bare minimum every doctor should have, ideally more.

Pay Attention to How Assets are Titled

Relying on some form of tenancy is not a substitute for real legal planning that gets assets into appropriate legal wrappers like trusts and LLCs, as two common examples. In this case, as our defendant doctor and her husband are in a community property state, both of them were named with the following result:

1. All their jointly held community assets were put at risk. Like many couples, they married young and the majority of their wealth was earned during the marriage and was exposed regardless of whether titled to her, him, or both of them.

2. The nearly $1 million vacation home, although outside the state, was fully available to the injured plaintiff who had a claim against both of them.

3. The vehicle was fortunately not owned by the medical practice, as it would have been sued as well.

*Actual example, only identifying details have been intentionally changed to preserve the privacy and attorney-client privilege of those involved.

Share or bookmark this post
  • Facebook
  • Google
  • LinkedIn
  • TwitThis

3 Tips On Managing Your Corporate Debt

7. April 2019 17:58 by Jason Kelley in

Whether that be a term loan, line of credit, or some other bank credit facility, a business usually has some sort of debt on the books. For big business especially, it’s important to know how to best manage your debt so it doesn’t hinder your growth or sink your business altogether. Here are three suggestions to better manage your debt as you grow your business.

 

1. Negotiate better terms

If protecting your cash flow is a key goal of yours, then making your minimum payment as low as possible gives your company flexibility to protect its cash flow. See if you can have your interest and principle accrue, or if you can have interest only payments due. You can always turn an interest only payment into an amortizing one by paying down additional principal.

2.Negotiate better amortization schedules

The longer it takes to pay off your loan, the lower your payments are going to be. If the loan amortizes over ten years, your payments are going to be lower than if it pays off over five. You may have to pay extra principle, but the key is to minimize your required payments to guard your cash flow.

3. Negotiate better interest rates

This may take a little tact and salesmanship, but the best tool to help you negotiate interest rates with your lenders is to get them competing for your business. This shift takes you out of the position of “applicant” and transforms your lenders into people trying to earn your business.

Share or bookmark this post
  • Facebook
  • Google
  • LinkedIn
  • TwitThis

Financial Reporting and the Law

2. April 2019 10:26 by Jason Kelley in

 

                                               

Morgan Lewis is a global law firm that practices financial, international, and commercial litigation that includes tax and estate planning forms of law, among others. Its blog informs both the company’s clients and the broader populace of the latest developments and financial regulations affecting how businesses and industries operate their accounting practices. Up and coming accountants who are planning to specialize in largescale financial services would do well to pay attention to this series of law blogs.

Share or bookmark this post
  • Facebook
  • Google
  • LinkedIn
  • TwitThis

Tax Pyramiding

19. March 2019 11:29 by Megan Kunis in

Pyramiding in a tax system refers to the imposition of a tax on a tax. It typically happens with taxes that are imposed on goods or services, such as a sales tax. Pyramiding causes a tax to violate several principles of good tax policy, including transparency, efficiency, equity and neutrality. For example, in California, most food purchased at the grocery store is exempt from the sales tax. However, the price paid for that food includes sales tax paid by all businesses in the production and distribution chain to get that food into the store. When a business pays a tax, it is one of many costs factored into its operations that either goes into the price of what the business sells and/or reduces profits. This effect makes the sales tax fail the transparency principle in that when you buy an item (whether tax exempt or not), the true amount of sales tax included in what you pay is not obvious due to pyramiding; the sales tax paid is definitely more than what is noted on your sales receipt.


The degree of tax pyramiding varies from state to state depending on the types of sales tax exemptions they provide to businesses. For example, California exempts purchases for resale. So, when the California grocery store buys food, it doesn't pay sales tax. Yet, it has paid sales tax on all of the equipment and other tangible personal property used in the store (supplies for example). Some states have reduced pyramiding by providing sales tax exemptions for certain types of equipment purchased by businesses, such as that used in manufacturing. Typically the rationale for such exemptions is to entice businesses to locate their manufacturing operations in the state.

The remedy for tax pyramiding is to not have businesses pay sales tax. If they don't pay the tax, then it won't be factored into pricing. There are two big obstacles to fixing pyramiding though:

  1. Pyramiding has been around since the beginning of the sales tax and it generates revenue for the state (likely at least 20% of the state sales tax comes from businesses). How do you replace that revenue?
  2. Many people (including lawmakers) think that businesses have too many tax breaks and are not paying their fair share and would not support legislation to make all business purchases exempt from sales tax.

Despite these obstacles, there are reasons to remove pyramiding from the sales tax system and ways to deal with the obstacles. First, there are other reforms needed to the sales tax system, such as base broadening (along with rate reduction; see my Report #2a at the link below). Revenue generated from that change can cover the revenue generated from pyramiding and be a more equitable and transparent way to generate sales tax revenue. Removal of pyramiding would likely generate increased business activity in the state because the price of doing business here would drop - other tax revenues should go up from the change. Also, taxpayer education would help. Individuals need to see the hidden cost of pyramiding (which they pay; businesses pass most costs onto customers). It would be more clear to individuals how much sales tax they are paying if the sales tax shown on the sales slip is the total amount and that will only happen if pyramiding is removed from the sales tax system.

The pyramiding flaw is a U.S. one. All industrialized countries other than the U.S. use a value-added tax to tax consumption (rather than a sales tax). A VAT that does not allow for exemptions and special rates does not impose a VAT on businesses purchases.

Share or bookmark this post
  • Facebook
  • Google
  • LinkedIn
  • TwitThis

Real Time Fund Accounting

19. February 2019 12:53 by Junita Jackson in

 

Profit-oriented businesses and non-profit organizations use two different accounting methods to track, record, and report their financial performances depending on their purposes and goals: the traditional business accounting system and the Fund Accounting method.

Traditional business accounting – used by business entities, such as a partnership, a corporation or a limited liability company (LLC) – focuses on the ability of the entity to generate profit, providing information on how much money was earned, how much was spent and how much was left over in a given time. Traditional business accounting also measures the finances of an entity as a whole. Businesses using this method prepare balance sheets that list the company’s owner’s equity (comprised of assets and liabilities), as well as income statements that list the company’s revenues, gains, expenses and losses every quarter.

On the other hand, fund accounting – used mainly by non-business entities, such as government agencies, non-profit organizations, churches, hospitals, and colleges and universities – breaks down an organization into a series of independent and self-balancing funds, making sure that the money earned, received and spent are all properly allotted for their specific purposes. Non-profits, having no owners, do not use balance sheets and income statements. Instead, they compile “statements of financial position” that focus only on assets and liabilities, as well as statements of activities each quarter.

Benefits of Fund Accounting

Generally Accepted Accounting Principles (GAAP), a set of accounting guidelines, rules, principles and standards used in the US, require non-business entities and government institutions to use fund accounting. Fund accounting offers many advantages and listed below are some its benefits for non-profit entities:

  1. Clear allocation and management of funds – Fund accounting allows organizations to appropriately allocate and manage the revenue they receive from different resources, such as tax payments, donations, grants, loans, and other public and private sources, into specific projects or goals. For example, the finances of a municipal government must be segregated into different funds like public works, recreation, and other services.
  2. Better tracking of restrictions – Because the revenue received by organizations and government institutions must be separated into their specific purposes in accordance with laws, regulations and restrictions, fund accounting helps these entities better monitor the restrictions attached with the revenue. In the same example above, tax payments from the citizens that the municipal government receives may only be used to fund certain public services.
  3. Transparency in evaluating performance goals – Fund accounting identifies the sources of the revenue and records the organization’s debts and assets. This makes it easier for people like fund administrators, managers, donors or taxpayers to evaluate the performance of an organization by emphasizing its strengths, weaknesses, and efficiency in turning revenue into expenses in relation to its goals and objectives.

Shifting to Real Time Fund Accounting

Like all the other sectors, the accounting industry has evolved over the decades to keep up with the changes that come with the advancements in information technology. Modern accounting firms and tech-savvy accounting professionals now heavily rely on advanced technologies and cloud-based solutions that provide quick and efficient results, allowing them to monitor and manage finances without the long wait times and turnarounds.

Speed and reliability are essentials in the world of accounting not just for profit-oriented entities but also for non-profit institutions. Taxpayers, funders, and donors are expecting more transparency and efficiency in financial reporting, demand for the capability to transfer information in real-time instead of relying on conventional financial reporting methods.

With real-time reporting in financial systems or real-time accounting, non-profits are able to see their financial data live, which allows them to make decisions and adjustments faster than before and enable a more streamlined monthly close process. It also provides crucial financial information that is always up-to-date, increasing accuracy and reducing the room for errors.

To help non-profit entities keep up with these demands and changes while still maintaining its focus on more important non-profit activities, Maxfinancials Accounting offers fund accounting outsourcing services that are tailored to the specific needs of the organization.

Armed with a cost-efficient and secure technology infrastructure, Maxfinancials Accounting’s team of highly qualified experts and Certified Public Accountants (CPAs) will serve as your fund accounting department without the burden of additional training and operational costs of an in-house team.

Share or bookmark this post
  • Facebook
  • Google
  • LinkedIn
  • TwitThis

Asset Protection Planning

10. February 2019 11:30 by Junita Jackson in

Now that you are familiar with the most important asset protection and estate planning concepts how do you create the best plan? Protecting what you have from liability and preserving your estate for your family involves many new concepts for you and it’s not always easy deciding where to begin.

In this section, we will present a summary of the issues and options available-techniques to think about to frame the building of your overall plan. This is the approach we use with our clients to analyze their particular needs and to build an efficient program for asset protection, estate planning, and tax savings.

“Asset Protection and Estate Planning with the Family Savings Trust“

An increasingly popular tool used for asset protection and estate planning is known as The Family Savings Trust.  The term is broadly descriptive of a trust designed specifically to hold and protect a variety of assets against lawsuits and business risks.  It can be very flexible in form and allows for the accomplishment of most important asset protection and estate planning goals. 

“What is the Best Asset Protection Plan for Physicians?“

In our initial discussions with a client, these questions always come up “What’s the best asset protection plan?”  “Are there any plans which are completely bulletproof?”

Like any well-trained professional, I usually duck those kinds of direct and unconditional questions. After all, this is the legal system we’re talking about and when we compound the mixture of judges, jurors, and lawyers,  the results can be unexpected, to say the least.  The  Law is probably a lot like medicine in that respect.  So while we can’t honestly guarantee that the particular plan we design will produce the exact outcome we want, we do know what has happened before in similar situations.  If existing case law and legislation are clear and well developed then an asset protection plan that falls within the pre-set boundaries will have favorable and predictable results.

“Answers to Key Asset Protection Questions“

When I sit with clients to prepare or review their estate planning and asset protection goals in a wide variety of questions and issues arise: What plan is most efficient? How are tax savings created?  How do we protect against the lawsuit and business risk?  Although I have addressed many these topics in detail in previous columns, here are a few starter questions which often arise and which may open the door for further thought and discussion. 

“Asset Protection: Needs Change Over Time“

The type of asset protection planning you need depends on where you are in your career. Because the amount and form of your investments and the particular risks you face will vary over time, your initial planning should be appropriately flexible and capable of adjusting to meet these changing needs. 

“When Is It Too Late For Asset Protection?”

One of the life’s ironies is that the worst time for asset protection planning is when you really feel like you need it the most. Although the law favors and encourages asset protection in most circumstances, there comes a point in financial transactions and legal proceedings when it is no longer permitted. In some cases, this boundary is clearly defined, but often the question of when the remedy of asset protection is still permissible is fuzzy. Experienced planners can follow several guidelines and make some educated guesses about where the line should be drawn in situations that physicians may encounter in their practice. 

 

Share or bookmark this post
  • Facebook
  • Google
  • LinkedIn
  • TwitThis

When It Comes To Filing Your Taxes, Today Is Not The Day To Dawdle

16. January 2019 11:35 by Megan Kunis in

Tax returns are due  -- as is any remaining money you owe to Uncle Sam for 2016.

 So if you still have an unpaid balance for last year, you'll have to act fast to avoid getting penalized.
 

The best thing you can do is file your 2016 tax return, or at least file for an automatic six-month extension.

If you don't do either, you'll be hit with a failure-to-file penalty. That will amount to 5% of your unpaid taxes for every month -- or part of a month -- that you don't file for up to five months. So that penalty will cap out at 25% of your unpaid taxes.

On top of that you'll be subject to a failure-to-pay penalty, which amounts to 0.5% of your unpaid taxes every month, for up to 50 months, for a maximum of 25% of your outstanding balance.

Did we mention interest? On top of these penalties, you'll also be charged interest on your unpaid taxes starting on April 19.

Here's what you should do if you owe money but still haven't filed:

At least file something.

As the IRS helpfully notes, "the failure-to-file penalty is 10 times more than the failure-to-pay penalty. So if you can't pay in full, you should file your tax return and pay as much as you can." Or at least file for an extension and include some payment with it.

Learn what your payment options are.

The IRS has a number of payment plans available if you can't pay all that you owe.

If you owe more than $10,000, you might consider hiring a tax attorney, enrolled agent or CPA with experience setting up payment plans to represent you.

"The more that is owed to the IRS, the more complicated it becomes to negotiate with the government," according to Garrett and Deborah Gregory, two former IRS attorneys who wrote the "Guide to IRS Collections for Liabilities under $10,000."

Filing may help you avoid a late-payment penalty

If you've already paid at least 90% of the taxes you owe for 2016, you may be spared the late-payment penalty so long as you at least file for an extension. You will, however, still owe interest on your unpaid balance until it's paid off.

If you're reading this and thinking I don't have to file today because I probably don't owe any more money, file anyway. What if you're wrong and it turns out you do owe money? If you don't file your return or apply for an extension, you'll get hit with the penalties above plus interest.

Second, if you're owed a refund, why wait? The average refund the IRS has paid out so far this year is $2,850.

Share or bookmark this post
  • Facebook
  • Google
  • LinkedIn
  • TwitThis

What Business Advisory Tools Do I Choose?

25. December 2018 16:17 by Junita Jackson in

With a growing number of business advisory software tools on and entering the accounting market, it is often difficult to know what to choose.

At Smithink we recommend following our EnablerTM Seven Step to Success process using the best software at the critical steps. It is not as easy as having one tool for each step. There are several great applications that can be used. In this article, we will look at some of the tools that are available for each step.

The first step in the EnablerTM process is preparing your firm to succeed with business advisory services. This is critical to the ongoing delivery of services and should include the appointment of a champion and analysis of the right clients to start with. Many firms are using Excel sheets and Word documents to plan out their service packages and strategies for implementation. Key to this step is the development of a Client Relationship Management (CRM) solution such as MYP's Arm and Arm Pro.

From there you need to unlock your client's business advisory needs with an interactive client needs analysis. This, in my opinion, is the most important step, as it will indicate where the client's strengths and weaknesses are, and allows a proposal to develop to address specific needs. Great cloud tools here include Cash Flow Story's simple four-chapter approach to business performance and My Yardstick What's Important to you (WITY) tool and E-Scope automated pricing system can assist here to understand client needs and develop innovative proposals.

The third step is to create a "disturbance" in your client's mind using business value assessments. Paramount to this step is establishing how much the client thinks their business is worth against the commercial value and linking this to the concept of a Business Value Gap (BVG). Some of the best applications here are Cash Flow Story's Business Value Indicator and Bastar's materials, tools and programs that will calculate a capitalization rate for the client's business off financial data and a risk and value assessment. Another new tool in this space to increase the sellability of your client's business is Sellability Score.

From there we introduce financial diagnostic software to fill the gaps by analyzing and managing the client's key macro drivers and results that will improve their financial performance. We will look at where the business is today, its strengths (green flags) and weaknesses (red flags) and where it can be in the future. There are many solutions here including Cash Flow Story's Power of One, PANALITX, Fathom and Profit Guardian.

It is then time to look at the strategies required to implement micro services using smart tools and resources such as ESS BIZTOOLS and ESS BIZGrants. Attaché Software also has great tools here that can assist to implement key strategies with your clients.

Then track the performance of the client's business by preparing budgets and cash flows (or action plans) with Castaway, Calxa or Plan Guru. This step can link back to the development of business and action plans. MAUS Software's Master Plan is an innovative solution to address this need. Another great tool here is MYP's Estate Planning application to unlock your client's estate planning needs and develop key strategies for the future.

Finally, generate new business by growing your business advisory specialization through profitable scenario planning and offering your "how would you like to see the financial impact of every business decision before you make it" service. This look into the future requires software that can simply show the client their pre and post position. Any of the financial diagnostic tools will adequately handle this task.

With this myriad of choices, a firm needs to be confident that they select the right application for their clients and staff.

Share or bookmark this post
  • Facebook
  • Google
  • LinkedIn
  • TwitThis

5 Simple Ways To Create A Balance Sheet

16. December 2018 19:21 by Junita Jackson in

First things first: what is a balance sheet? A balance sheet is an essential way to evaluate a business’ financial health and can be calculated every month, quarter or half-year to create a snapshot of a company’s net worth.

In this article, we will be discussing how to calculate an annual balance sheet for a business. Creating an annual balance sheet will help you evaluate the equilibrium between your company’s assets against its liabilities, to determine the overall financial strength and value of your business. For an example of a full balance sheet, scroll down to see the example at the end.

1. Understand the Basic Equation

The following equation is a simplified representation of what a Balance Sheet calculates: the total sum of your company’s assets equals the value of the company’s liabilities and owner’s equity.

Assets = Liabilities + Owner’s Equity

As with any math equation, you can play around with the equation to isolate one category. Most business owners and investors use the following equation to calculate the value of the company’s equity.

Owner’s Equity = Assets – Liabilities

2. Calculate Assets

Assets, money, investments, and products the business owns that can be converted into cash: These are what put companies in the financial positive. A thriving company should have assets that are greater than the sum of its liabilities; this creates value in the company’s equity or stock and opens up opportunities for financing.

It’s important to list your assets by their liquidity—the facility by which they can be turned into cash—starting with cash itself and moving into long-term investments at the end of the list. For the purpose of an annual balance sheet, you can separate your list between “Current Assets,” anything that can be converted into cash within a year or less, and “Fixed Assets,” long-term possessions that can be sold or that retain value down the line, minus depreciation.

“Current Assets” may include:

  • Cash: All money in checking or savings accounts
  • Securities: Investments, stocks, bonds, etc.
  • Accounts Receivable: Money owed to the business by a client or customer
  • Inventory: Any products or materials that have already been created or acquired for the purpose of sale
  • Prepaid Insurance: Any payments made in advance for business insurance coverage or services (this tends to be paid in advance for the year).

“Fixed Assets” may include:

  • Supplies: Important objects used for business operations (manufacturing equipment, computers, office furniture, company cars, etc.)
  • Property: Any office building or land owned by the business
  • Intangible Assets: Intellectual property such as patents, copyrights, trademarks and other company rights that retain intrinsic value

3. Determine Liabilities

Liabilities are the negative part of the equation; these include operational costs, debt and material expenses. Generally speaking, the lower your liabilities, the greater the value of your company (and equity) can be. “Current Liabilities” include cash spent, as well as any debts that must be paid out within one year, while “Fixed Liabilities” refer to bills due anytime after one year.

“Current Liabilities” may include:

  • Accounts Payable: Money owed by a business to its suppliers or partners
  • Business Credit Cards: Company credit card bills due
  • Operating Line of Credit: Any money owed to a bank that has extended the business an operating line of credit
  • Taxes Owed: Any federal and state taxes owed for one year
  • Wages and Payroll: Employee compensation, including wages, medical insurance, etc.
  • Unearned Revenue: Any revenue garnered from a service or product that has yet to be delivered to the customer or client

“Fixed Liabilities” may include:

  • Long-Term Mortgages: Property or building mortgage expenses
  • Bonds payable: Long-term bonds owed to the government, as well as any interest paid on the bond (this interest is often semi-annual and can be added to “Current Liabilities”)
  • Pension Benefit Obligations: The total amount of money the company owes to employee pension plans up to the current date
  • Shareholder’s Loan: A form of financing provided by shareholders
  • Car Loan: Any long-term car loans on company vehicles (plus insurances costs)

4. Equity Valuation

Owner’s Equity = Assets – Liabilities

The value of your assets minus your liabilities will result in an estimation of the value of your company’s capital. If this equation results in a negative net worth, this can be dangerous for a small business; it will make it difficult for to secure financing, which can be troubling for a company whose expenses are already eclipsing its profits.

If, however, a company has positive equity, this means that business owners have the option of acquiring capital by selling part of their business through equity, stocks and/or dividends.

In a sole proprietorship, this is called the “Owner’s Equity”; in a corporation, this is called “Stockholder’s Equity,” and it can include common stock, preferred stock, paid-in capital, retained earnings, etc.

“Equity” may include:

  • Opening Balance Equity: The initial investment into the company
  • Capital Stock: The common and preferred stock a company issues
  • Dividends Paid: Profits paid out to shareholders by a company (applies to corporations)
  • Owner’s Draw: Portion of the revenue used by company’s owner (applies to sole proprietorships)
  • Retained Earnings: The sum of a company’s consecutive earnings since it began

Having an Income Statement will assist you in filling out this section since it helps you determine the opening balance equity and the retained earnings.

5. Consider All Applications

When you put it all together, a balance sheet will probably look something like this:

balance sheet example
 

A solid balance sheet is an essential financial statement and part of a complete financial report. It can be used to secure financing or take a snapshot of a company’s current financial state, but it can also be used to evaluate the worth of your company over time. While accounting software like QuickBooks can easily generate balance sheets and other financial statements, it’s good to know the process to ensure your calculations are accurate.

Comparing your “Current Assets” minus “Current Liabilities” on a yearly basis will paint a picture of your company’s annual growth and expenses, which may have room for improvement. Calculating “Fixed Assets” minus “Fixed Liabilities” can provide a more long-term view of the company’s value over time and its ability to pay back long-term debts or expenses built up over many years.

Remember, the expenses of different companies may vary greatly, so don’t forget the assets and liabilities that are specific to your industry or area. For more help with balance sheets and other financial statements, see our infographic on financial reporting.

Share or bookmark this post
  • Facebook
  • Google
  • LinkedIn
  • TwitThis