Balance Sheet

Objective: By the end of this lesson, you will be able to read and prepare a restaurant balance sheet. You will be able to:

• Classify assets, liabilities and equity.
• Check that the balance sheet balances.
• Calculate two ratios lenders look at.

The balance sheet equation

Assets = Liabilities + Owner’s equity

Everything the business owns was paid for either with borrowed money (liabilities) or with the owners’ money and the profits they left in the business (equity). That is why the two sides always balance.

Example: Bistro 60, end of Month 1

Assets
Cash	$30,000
Inventory (food, beverage)	$6,000
Prepaid expenses	$4,000
Current assets		$40,000
Kitchen equipment	$120,000
Furniture and leasehold improvements	$90,000
Less accumulated depreciation	($2,000)
Fixed assets		$208,000
Total assets		$248,000

Liabilities and equity
Accounts payable (suppliers)	$9,000
Sales tax and payroll remittances owed	$5,000
Loan — portion due within 12 months	$12,000
Current liabilities		$26,000
Bank loan — long-term portion	$108,000
Total liabilities		$134,000
Owner’s investment	$105,400
Retained earnings (Month 1 net profit)	$8,600
Owner’s equity		$114,000
Total liabilities and equity		$248,000

Notice that the $8,600 net profit from the income statement appears here as retained earnings, and that total assets equal total liabilities plus equity: $134,000 + $114,000 = $248,000.

Two ratios lenders check

• Current ratio = current assets ÷ current liabilities = 40,000 ÷ 26,000 = 1.54. It shows whether you can pay what is due in the next year; above 1 means you have more short-term assets than short-term debts.
• Debt-to-equity = total liabilities ÷ owner’s equity = 134,000 ÷ 114,000 = 1.18. It shows how much of the business is financed by debt rather than by the owners.

Tips

• Prepare an opening balance sheet for the day you open — it shows the bank exactly where its loan went.
• Sales tax and payroll deductions belong to the government, not to you. Keep them visible as liabilities and never spend them.
• Equipment loses value over time; depreciation spreads its cost over its useful life.