It amazes me how long I went without any idea on what a balance sheet was. I ran my company for probably 3 years without ever knowing. My accountant never even offered the opportunity to learn it.
As a side note to all the accountants out there. You should be providing FREE basic accounting training to your customers. These screencast videos I make take just a few minutes to make.
Okay, let’s talk about this a little bit. First off don’t go and ask your banker to explain what a balance sheet is to you. They are going to tell you that if you own a house then you would put the value of that house on your balance sheet as an asset because your home is your greatest investment. You have just received crap information. Even if your house is completely paid off it still isn’t a true asset as it cost you money every year. At the end of a year it won’t send you a check. Quite the opposite as you will write a check to your county to pay taxes. The truth is that your bank has your house on their balance sheet as an asset because they own it free and clear and you write them a check each month.
A true asset is something that pays you more than it costs you. Many of us have few real assets in our lives. Your 401k or Roth are assets. Your savings account is an asset. You want to know something? Your banker has your savings account on their balance sheet as an expense because THEY pay you interest each month on that balance. Why do you think that there isn’t a tax advantage for having a savings account? Because the banks will lobby way too heavily against that. Your savings account costs them money and they don’t like that. They don’t need your money to make loans. By law they can loan out $100 for every $10 (or something like that) in deposits. The only reason they give out checking accounts is because they are betting on you using them to borrow money.
As a business owner you need to get your balance sheet in QuickBooks straightened out. I have created a 15 minute screen cast video explaining the basics of your balance sheet with instructions on how to track money borrowed from or loaned to others.
It is a free gift to you for joining our mailing list.
awesome post James…..keep the great info coming!
Thanks brother!
I recommend everyone to go out and read Rich Dad Poor Dad and you will get a quick and dirty explanation of the balance sheet along with a cash flow statement. This is more of a conceptual explanation than what James will give you, but there is a lot of other great advice in the book.
Josh Bulloc
Kansas City, MO
I liked Rich Dad Poor Dad quite a bit. I thought CashFlow Quadrant was even better.