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Balance sheet

What is a balance sheet?

A balance sheet lists assets, liabilities and net worth as of a certain date. It can be thought of as a snapshot of your financial condition at that time. A balance sheet is also sometimes referred to as a net worth statement.

For producers whose fiscal year coincides with the calendar year, January 1 is an excellent date for the annual balance sheet. It marks the beginning and ending of their business year, and enables the completion of a good accrual adjusted income statement. Producers, who have a fiscal year different than the calendar year, should complete their annual balance sheet at the beginning of their fiscal year.

Example of farm balance sheet.
An example balance sheet from FINPACK shows assets on the left, liabilities on the right, and net worth balanced at the bottom.

Creating a balance sheet

For an example, we’ll use the FINPACK software version of a balance sheet but other balance sheets are structured in a similar way. The assets are on the left side of the page, and the liabilities are on the right. The net worth appears on the bottom right hand side of the page. When you add the liabilities plus the net worth, they will equal the total of the assets. That is where the term “balance” sheet comes from. One side balances with the other.

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What can you learn from a balance sheet?

A balance sheet by itself does not show whether you are making or losing money. It does not show where you have come from or where you are going.

If we think of our balance sheets and the money we spend, here are some questions we need to ask ourselves:

  • Do the dollars spent for family living show up on balance sheet? Of course not. They are gone.

  • What about the dollars spent for income taxes? Same thing. They are gone.

  • What about the dollars spent on principal payment of term debt? They do appear on the balance sheet, because now the liabilities are smaller.

Your balance sheet is just one of the financial statements needed to understand your farm’s yearly financial health, key ratios and measurements. Further understanding of your farm’s finances can be produced by looking at changes in your financial statements over time. For example, by comparing several balance sheets completed over time, you can identify significant trends in your farm business.

Your balance sheet can be analyzed using standard accepted ratios and measurements. By understanding your balance sheet and the key liquidity and solvency ratios and measurements, you can identify strengths and weaknesses in your finances. Learn more about ratios and measurements.

David B. Bau, Extension educator; Gary A. Hachfeld, former Extension educator; C. Robert Holcomb, Extension educator; Nathan J Hulinsky, Extension educator; and Megan L. Roberts, Extension educator

Reviewed in 2018

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