The retail balance sheet is one of the retail financial statements that shows the assets of the business (what the business owns), the liabilities (what the business owes) and the shareholders’ equity (Assets -Liability).
So let’s find out more about the balance sheet of a retail business, and how it is linked to the P&L.
Why is it called balance sheet?
Short Answer: Because it has to balance.
The balance sheet lists the assets of the business vs its liabilities + shareholders’ equity (or net worth). Both sides have to balance.
Assets = Liabilities + Equity
The simplest way to understand this is through drafting your personal balance sheet.
Let’s have a look at how my, or your, balance sheet might look like
You have the following scenario:
- 5000$ cash in the bank
- 10,000$ invested in stocks
- A home worth 350,000$
- You paid 50,000$ down on the home and have a mortgage of 300,000$
- You have credit card loan of 1000$
The question now is: What is your net worth (Equity)?
Equity = Assets – Liabilities
Equity = 5000$ + 10,000$ + 350,000$ – 300,000$ – 1000 $ = 64,000$
As you can see here, your net worth or equity is 64,000 $. That’s because you have total assets of 365,000 $ but also total liabilities of 301,000$.
So your balance sheet has to balance the assets on one side, and the liabilities and your equity on the other side.
Retailer’s Balance Sheet Components
Now that we’ve understood the concept through the personal statement, let’s see how a retailer’s balance sheet looks like.
This is a balance sheet example for a retail business and you can download it for free from the button below.
Assets are segregated into current assets and long term assets
Examples of current assets include
- Cash & Cash Equivalents
- Short term investments
- Merchandise inventory
The reason merchandise inventory is considered a current asset is because typically merchandise can be liquidated quickly if offered at low prices.
Note: Current assets also include Accounts Receivable, which is any payment that is due to the business for goods delivered to customers but still not paid for. Since we are talking about retail & ecommerce businesses, and these businesses typically get paid before the customer receives the goods, we didn’t include it in the template. If you are selling on installments and will only get paid later, this is where you will insert this amount.
Examples of long term assets include:
The value of these assets will be net of the total depreciation amount that has been deducted every year from the P&L; i.e their real current value if they were to be sold in the market.
Liabilities are also segregated into current and long term liabilities
Examples of Current liabilities include:
- Accounts Payable, e.g payments due to suppliers
- Taxes that are already due.
- Current installments of long-term debt
- Current operating lease liabilities
Examples of long-term liabilities include:
- Long-term debt
- Long-term operating lease liabilities
Equity will include any share capital (Equity Capital) that the owners paid in the business and any retained earnings that the business has accumulated and didn’t pay them in the form of dividends.
Which takes us to the next point..
What’s the link between the P&L and the balance sheet?
The P&L will generate the net profit for the year and this profit/loss will be added to the balance sheet in the form of “Retained Earnings” under equity or net worth. Retained earnings are the cumulative amount of profits and losses the business has generated in the previous years and decided to “retain” inside the business.
Learn More: P&L Management
Now because the balance sheet has to balance, and because Equity = Assets – Liabilities, any reduction in retained earnings throughout the years, means reduction in equity or net worth in the form of reduced assets or increased liabilities.
For example, if you make losses year after year, your inventory level (asset) might be reduced without replacement of new merchandise OR you will have to borrow money (liability) to buy merchandise and keep the business going.
If you make profits it can be used to increase your assets in the form of buying more merchandise, equipments or keeping cash in the bank. It can also be used to reduce your liabilities by paying down your debt.
So looking at the balance sheet will give you a better understanding of how the business has been performing over the years, instead of the short snapshot that the P&L gives for a certain period of time only.
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