The Balance Sheet is a core financial statement that provides a snapshot of your company's financial position at a single point in time. While the Income Statement shows performance over a period (like a video), the Balance Sheet shows what your company owns and what it owes on a specific day (like a photograph).
Its name comes from the fact that it is built on a fundamental equation that must always balance, reflecting the idea that a company's resources are always claimed by either lenders or owners. Understanding this report is crucial for assessing your company's financial health, making strategic decisions, and securing financing.
To view this report in Dappr, navigate to Accounting from the main menu, select Reports and statements, and then click on Balance sheet in the sub-menu.
The accounting equation
The entire Balance Sheet is structured around a simple, powerful formula known as the accounting equation: Assets = Liabilities + Equity
This equation means that everything the company owns (its assets) is funded by either borrowing money from others (liabilities) or by investments from its owners (equity). It is the unbreakable logic of accounting; for every asset, there must be a corresponding claim against that asset. The two sides of the equation must always be equal, or "in balance."
Think of it like buying a house: If you buy a $500,000 house (the asset), you might fund it with a $100,000 down payment (your equity) and a $400,000 mortgage (the liability). The equation balances: $500,000 (Asset) = $400,000 (Liability) + $100,000 (Equity).
Breaking down the Balance Sheet
Your Dappr Balance Sheet is organized into two main sections that reflect this equation: Assets on one side, and Liabilities and Equity on the other.
Assets (What your company owns)
Assets are economic resources that have future economic value. They are things your company owns that can be used to generate revenue. Assets are typically listed in order of liquidity, meaning how quickly they can be converted into cash.
Current Assets: These are assets that are expected to be used or converted into cash within one year. They are a key indicator of a company's ability to handle its short-term operations.
Cash and Cash Equivalents: This is the most liquid asset and includes the funds in your Dappr Financial Account and other bank accounts.
Accounts Receivable: This is money owed to your business by customers for goods or services you have delivered but have not yet been paid for. While it's good to have sales, a high Accounts Receivable balance could indicate you need to improve your collections process to ensure you have enough cash on hand. Not applicable when using cash basis as accounting method.
Inventory: If your business sells physical products, this is the value of the goods you have on hand to sell. Too much inventory can tie up cash, while too little can lead to lost sales.
Non-Current Assets (Fixed Assets): These are long-term assets that are not expected to be converted into cash within one year. They represent the significant investments made to operate the business.
Property, Plant, and Equipment (PP&E): This includes physical assets like computers, machinery, vehicles, and buildings.
Accumulated Depreciation: This is a "contra-asset" account that you will see listed under PP&E. It represents the total amount of an asset's cost that has been methodically expensed over time to reflect its use, wear, and tear. This is not a cash expense, but an accounting concept to spread the cost of an asset over its useful life. The net value (
Asset Cost - Accumulated Depreciation) is called the asset's "book value."
Liabilities (What your company owes)
Liabilities are your company's financial obligations or debts to other parties. They represent claims that outsiders have on your company's assets.
Current Liabilities: These are debts that are due to be paid within one year. Managing these is critical for short-term cash flow.
Accounts Payable: This is money your company owes to its suppliers or vendors for goods and services it has received but not yet paid for.
Short-Term Loans: This includes any portion of a loan that is due within the next 12 months, as well as credit card balances.
Reimbursements Due: The total amount owed to employees or owners for out-of-pocket business expenses they have claimed through Dappr's reimbursement system.
Non-Current Liabilities: These are financial obligations that are due more than one year from the date of the Balance Sheet, such as the long-term portion of a business loan taken out to purchase equipment.
Equity (The owner's stake)
Equity represents the net worth of the company from an accounting perspective. It is the value that would be left over for the owners if all assets were sold and all liabilities were paid off. It is the owners' claim on the company's assets.
Contributed Capital (or similar): This is the total amount of cash and other assets invested in the business by its owners or shareholders, typically in exchange for stock or an ownership percentage. This includes the initial investment to start the company as well as any subsequent funding.
Retained Earnings: This is the cumulative net income of the business from previous periods that has not been distributed to the owners as dividends. This is the key link between the Income Statement and the Balance Sheet. Each period, the "Current year earnings" (your net profit or loss) from your P&L are added to this line. Profits increase Retained Earnings and therefore increase the owners' equity, while losses decrease it. It represents the wealth that the business has generated and kept over its lifetime.
Why is the Balance Sheet important?
The Balance Sheet provides critical insights into your company's financial structure and stability.
Assessing Financial Health: It gives a clear picture of liquidity (your ability to cover short-term debts with current assets) and solvency (your ability to meet long-term obligations). A quick health check is to compare Current Assets to Current Liabilities. If your Current Assets are significantly greater, you are likely in a good position to cover your upcoming bills. A company with high liabilities relative to its assets may be considered over-leveraged and high-risk.
Informing Strategic Decisions: The report can highlight potential issues and inform strategy. For example, if Accounts Receivable is very high, it might mean you need to be more aggressive in collecting payments from customers to improve cash flow. If you are considering a large purchase, the Balance Sheet shows how much debt the company is already carrying and whether it can safely take on more.
Securing Financing: Lenders and investors will always analyze your Balance Sheet. Lenders use it to assess your company's ability to take on and repay debt, looking at your existing debt levels and asset quality. Investors look at it to understand the company's capital structure, see who has claims on the assets, and determine how their investment would fit into the overall financial picture.
Together with the Income Statement, the Balance Sheet provides a comprehensive view of your business, enabling you to manage it effectively and plan for the future.