Running a business means understanding basic concepts in financial statements, such as the balance sheet. Your balance sheet represents what your business is worth; it breaks down your company assets and liabilities, line by line. Operating expenses are liabilities -- they are costs the business must pay. If the business assets are not enough to cover liabilities, the company is losing money.
Business assets are valuable items the company has on hand to cover its liabilities and realize a profit. Assets includes items such as the balances in bank accounts, the value of inventory and the value of business equipment. Some balance sheets may divide assets into current and non-current assets. Current assets are cash or items that can be easily liquidated into cash; non-current assets are items that are not easily converted into cash or would not be expected to become cash in the next 12 months.
Liabilities are costs and expenses of the business. There are two main types: current and long-term. Current liabilities are debts and obligations payable within the next 12 months. Long-term liabilities include debts and obligations that extend beyond a year. Examples of long-term liabilities include loans and mortgages. Current liabilities include expenses such as bills and operating expenses.
Operating expenses generally include all costs associated with business operations. Included are items such as the cost of sales, salaries, insurance premiums and taxes. Utilities, such as electricity, gas and water, also count as operating expenses. In contrast, an expense such as the loss on the sale of company property is not an operating expense, but it may be counted as a loss and a liability.
Business assets and liabilities help owners, investors and others interested in the business determine the value of the company. A business’s net worth is the liabilities subtracted from the assets. As operating expenses increase, the liabilities necessarily increase. An increase in liabilities decreases the overall value of the business, unless the company can make up for the increased costs by increasing the value of its assets.
