Startup Bookkeeping 101: The Balance Sheet

The Balance Sheet provides a snapshot of the business’s financial position at a point in time. It shows your assets and liabilities broken down by type and time frame. You can see how much your clients owe, how much cash you have on hand, and what your immediate obligations are to vendors and lenders. It provides tremendous immediate value as it gives you insight into where you are right now. Let’s go through a sample balance sheet section by section to learn more about how a quality bookkeeper can set you up for success.

Assets

The screenshot above is taken from a sample QuickBooks Online company. Accounts can be added or removed to suit your needs but the overall section break downs will remain the same.

Current Assets represent anything expected to be converted to cash or otherwise expensed/recognized as income within a year. The first stop for most startups will be Bank Accounts or Cash. This is fairly straightforward and shows the available cash in each account. Please note this section will show the actual cash available which accounts for checks sent but not yet cashed, deposits received but not yet reflected on the bank statement or website, etc. Each accounts should have a bank reconciliation performed monthly to verify it’s accuracy.

Next up is Accounts Receivable. This balance is simply the total amount of outstanding invoices issued to clients. This account can be reconciled against the AR Detail Report to identify which clients have outstanding balances and how old the invoices are. It is good practice to review the Detail regularly to ensure clients are paying on time.

Other Current Assets is a catchall section for accounts that do not fit into any of the other sections. For example, there's an Inventory Asset account for items expected to be sold within a year. The Prepaid Expenses account records payments made in advance, such as costs for an upcoming sales conference or a yearly software license. Meanwhile, the Undeposited Funds account reflects money received but not yet deposited, like physical checks sent to the office. This section is where you will see the most variance depending on your business. SaaS companies typically have a number of software licenses necessitating a larger Prepaid Expenses account. Trucking companies may issue advances to drivers and they would be listed in Other Current Assets in an Employee Advances account. It is not uncommon to break these accounts into sub accounts. For example, Prepaid Expenses can be broken into Prepaid Expenses – Software Licenses and Prepaid Expenses – Marketing to provide more clarity.

For Other Current Assets your bookkeeper should be able to provide a breakdown of what makes up each balance. Nothing should be in these accounts that cannot be explained. If you are confused or unsure of what you are looking at when reviewing your Other Current Assets section work with your bookkeeper until you are completely comfortable. In some cases, supporting schedules for certain accounts may be needed. In other, new accounts can be created to align the reporting with how you see the business. Because this is a fairly general account it is worth the time to make sure everything here is clean and supports your ability to run the business.

The final section here is Fixed Assets. These accounts show the value of equipment bought for the business that will be used for years. The general requirements to be a Fixed Asset include a useful life of over a year and a cost that is above a threshold set by the business or its auditors. For startups this threshold could be as low as $300 and more established businesses can be upwards of $1,000. For the specific amount for your business work with your bookkeeper and/or CPA to determine what makes sense for you. The two conditions mentioned above rule out items like office supplies or marketing materials that may be used over several months but are not truly Assets.

Fixed Assets are depreciated over their useful life, meaning a portion of the expense will be recognized each month. In the example case we can see that $1,000 of depreciation has been recorded for a truck. In this case there is only one Asset but if there were two trucks it would be acceptable to list a generic Vehicles account and include the value of both trucks in the account. A Depreciation Schedule should be prepared showing the value of each truck and how the cost and depreciation for each truck adds up to the amounts shown on the Balance Sheet. Please note here that depreciation for reporting purposes and depreciation for tax purposes can be different. Tax depreciation can be accelerated based on the type of asset resulting in lower taxable income while normal depreciation is slower resulting in higher net income. The two deprecation methods serve different purposes and are intended for different audiences but can cause confusion if this is your first experience owning a business. Your bookkeeper and CPA should be able to thoroughly explain your specific situation and give you full confidence in your reported numbers.

The Fixed Assets section should list each asset type, such as Vehicles, Computer Equipment, Buildings, etc. separately with their own associated Depreciation accounts that tie to your Depreciation Schedule. The end goal of this section is to show how much equipment you own and the rough value. Depreciation does not necessarily reflect the real-world value as that is influenced by many factors but can be used as a rough gauge for reporting purposes.

For SaaS businesses specifically, another section that may be needed is Intangible Assets. This section is similar to Fixed Assets in that it shows the value of an asset expensed over time but instead of equipment it lists things like development costs, patents, trademarks, etc. Before your software is sold many of its development costs can be added to a Software Development asset account and be listed on the balance sheet. Please work with your bookkeeper and CPA when determining which costs can be capitalized in this manner to ensure you will compliant with any tax laws and your financial statements will withstand audit scrutiny.

Liabilities

The next section on the Balance Sheet is your Liabilities. The section is further divided into Current and Long-Term Liabilities. Current Liabilities show all amounts due within one year of the statement date such as AP, credit cards, and the short term portion of loans. Long-Term Liabilities record everything due over one year from the statement date.

Using our example company we can see they owe vendors $1,602.67. Each month you should receive a breakdown of how much each vendor is owed and the total should tie out to the amount shown on the Balance Sheet. Startups can use these basic reports to create a short term cash forecast giving insight into your immediate funding needs.

Credit cards should have a reconciliation each month similar to a bank account.

Similar to Other Current Assets, Other Current Liabilities include amounts due to other parties that do not slide in naturally to another category. Some typical examples are sales tax payable, the short term portion of loans, and payroll liabilities. If you are using the Accrual basis of accounting you will see your accrued expenses here as well.

Long-Term Liabilities typically only includes long term loans but should include any other liabilities with a due date more than one year in the future.

In all cases the dividing line between a current and long term liability is when payment is due. If payment is due within one year of the Balance Sheet date the amount due will show up in a Current Liability account. Everything due over one year from the Balance Sheet date is considered a Long-Term Liability. Because the categorization is relative to the Balance Sheet date the same liability can shift between Current and Long-Term based on which time period you are looking at.

SaaS companies and any businesses with annual plans will have additional liability accounts called Deferred Revenue. These accounts reflect revenue for services clients have paid for but not yet received. For example, if a client pays for a 12 month license on January 1^st for $12,000 the January 31^st balance sheet will show $11,000 worth, or $12,000 / 12 * 11, of Deferred Revenue. Deferred Revenue is a more technical piece so be sure your bookkeeper understands your business and how ASC 606 may apply to your revenue recognition policies.

Equity

The final section on the Balance Sheet is Equity. This is where information regarding owner contributions, distributions, retained earnings, etc. will be reported. For single owner businesses this will be very minimal. As you gain investors and onboard additional partners or shareholders this section can grow and is a vital part of ensuring all ownership interests are correctly recorded.

Final Thoughts

The Balance Sheet is a vital part of your monthly financial review. It shows how much you have in the bank, the short-term liabilities you need to cover, and gives you a great look at the current state of your business. A quality bookkeeper will set your Balance Sheet up to align with your business specific needs while maintaining compliance with accounting standards. They will also categorize your transactions correctly so you can trust the data presented. The bookkeeper should also be able to provide details for each account showing what transactions make up the balance in any given account. If you are interested in learning how Woodham Bookkeeping can provide high quality financial reporting, including a quality Balance Sheet, please reach out to schedule a free consultation.