Stephanie Fan's Blog

For those who are familiar with Financial Accounting, there are three main types of financial statements: balance sheet, income statement, and cash flow statements.  These documents are meant to help you develop an idea of how your company is doing and whether it’s headed toward the right direction.

Let’s focus on the balance sheet.  A balance sheet is like a picture.  It defines the financial position of a company at a specific point in time and lists out the assets, liabilities and the owner’s equity.  Certain assets are debatable like intangible assets.  Intangible assets are difficult to match a dollar value to therefore cannot be recorded in the books unless it is proven by a transaction.   For example, a company’s brand name would be considered as an intangible asset.  As well, another figure that cannot be properly recorded by an accountant but should be put into consideration is “sweat equity – the idea that business owners shouldn’t pay themselves a salary while they’re building a business”.  It is important to understand that this is not a smart business decision because you are only masking your problems and not solving them.  This will eventually lead you to Chapter 11 bankruptcy.  Therefore we should always be cautious with the decisions we are making.

Although the balance sheet gives us a clear picture of how a company is doing, it will not clearly profile the entire company without examining the other two, equally-important financial statements.

http://www.theglobeandmail.com/report-on-business/your-business/business-categories/financial-management/the-sweat-equity-myth/article1738472/