When you are in business, you are trying to make money. You do this by investing money and buying things or making things which you believe you can sell and generate more money than you invest. The surplus or profit is your income.
So if you are in business there are two basic things you ought to know about your money:
|Where did it come from?
|Where did it go to?
Writing this information down gives us the first type of account that a business needs – a balance sheet. It usually looks like this:
BALANCE SHEET for XXX Business on 30 September, 2009
(where the money came from)
(where the money went to)
The information is set down in two columns. Sometimes people write “Uses” on the left and “Sources” on the right. Why is it a balance sheet? Let’s see.
Imagine you are planning to start a small business – a simple trading business, maybe buying and selling some fruit along the street. You have got $10 to invest in your new enterprise. This is how your balance sheet would look before you start trading.
|Cash in hand
Now can you see why it is called a balance sheet?
We are simply "accounting" for the money invested in a business at any given moment by describing what has been done with it. The two figures must be equal or "balance" because they are saying two different things about the same sum of money.
Notice too, how you, the owner, appear in the balance sheet simply as a source of funds for the business. It is normal practice to regard a business as a separate entity from those who invest in it.