What a Balance Sheet Is and Steps to Create One

Do you ever wonder about the financial health of your business or how investors perceive your company's financial stability? This comprehensive guide on creating and understanding a business balance sheet helps answer these questions. We discuss the complexities of balance sheets, highlight their purpose, and the step-by-step process of creating one.

You'll discover how balance sheets are instrumental in tracking your company's assets, liabilities, and equity over time. This knowledge provides insights into your company's net worth and strengthens your strategy when applying for investment opportunities. Continue reading as we empower you with tools to elevate your business financial understanding.

What Is a Business Balance Sheet?

A balance sheet is a financial statement that provides a snapshot of a business's financial position at a specific moment in time. It details the company's assets (what it owns), liabilities (what it owes), and shareholders' equity (the net worth or capital of the company). These three components provide valuable insights into a company's financial health and operational efficiency.

Balance sheets can also serve as documentation if you are applying for investment opportunities.

How Do You Create a Balance Sheet?

There are several steps involved to create your balance sheet:

Determine the reporting date and period

In the first step, you'll determine the reporting date. For many companies, this is typically the last day of a fiscal quarter. For companies that report their earnings annually, this is usually December 31.

Calculate assets

In the second step, you'll calculate current and long-term assets. You should arrange both categories along with their sub-categories. After you write the amounts, add them together to determine your assets.

Calculate liabilities

In the third step, you'll calculate your liabilities, both current and long-term, by summing up the amounts. 

Calculate shareholder equity

In the fourth step, you'll calculate shareholder equity. Like assets and liabilities, there are different sub-categories of equity that you'll reference, such as earnings and stocks. After you write the amounts, add them together to determine total equity.

Compare equity and liabilities to assets

In the fifth step, you'll combine equity and liabilities. The sum is the number that you'll compare against your assets to determine if your finances are balanced.

Importance of a Balance Sheet?

Creating and using balance sheets have fundamental advantages. After creating a balance sheet, you'll determine the financial status of your company. This can be helpful if you're planning to save additional funding for business needs or emergencies. 

A second reason you'll need a balance sheet is that it is useful for potential lending opportunities. As you create balance sheets over consecutive quarters, you'll have detailed records showing your company's assets, equity, and liabilities. This will help lenders determine whether you're more likely to pay and receive investments from lenders.

Finally, the balance sheets structure allows you to see upcoming liabilities in the forms of short-term and long-term debt. If you create a balance sheet, you'll determine which liabilities you should address first, preventing current and future problems.

What Is Included in a Balance Sheet?

A balance sheet includes four things: 

• Assets 
• Earnings
• Equity 
• Liabilities

An explanation of each element of a balance sheet follows below.

Equity

Equity is what will remain after you subtract liabilities from your assets. You'll also hear equity used interchangeably as shareholder's equity. The amount of equity that a business has is the net worth of the company. 

Assets

Assets are what your company owns. You'll write this on the left side of your bookkeeping document. There are two types of assets: current assets and long-term assets. 

Current assets are assets that you'll use within the next year. It comprises several categories, such as: 

• Accounts receivable: Money that customers owe the company
• Cash and cash equivalents: Assets that can become cash immediately
• Inventory: Goods available for sale
• Marketable securities: Assets that can become cash quickly, such as stock
• Prepaid expenses: The value that has been paid for, such as advertising, insurance, and rent

Long-term assets, also known as non-current assets, are assets that you won't use within a year. Instead, long-term assets will benefit your company for several years. 

Like current assets, long-term assets comprise several categories, such as: 

• Client lists, patents, and trademarks 
• Fixed assets: Equipment, plant, and equipment (also known as PP&E), including buildings, land, machinery, and vehicles
• Intangible assets: Listed on balance sheets if acquired rather than developed
• Long-term investments: Bonds, real estate, stocks (Long-term investments also include investments in other companies.)

Liabilities

Liabilities are the money that a business owes to other parties. You'll write this on the right side of your balance sheet. This can include monthly bills, rental costs, and salaries to employees. Similar to assets, there are two types of liabilities: current liabilities and long-term liabilities. 

Current liabilities are liabilities due within one year. You'll arrange these liabilities in the order of their due date. Current liabilities could include:

• Accounts payable
• Bank indebtedness
• Current portion of long-term debt
• Customer prepayments
• Dividends payable and others
• Earned and unearned premiums
• Interest payable
• Wages payable

Long-term liabilities are liabilities due beyond one year. These include:

• Deferred tax liability: Accrued taxes but taxes that you won't pay for another year
• Long-term debt: Interest and principal on bonds
• Pension fund liability: Money that businesses pay into employees' retirement accounts

Earnings

Earnings are the last thing that you record on your balance sheet. You'll write this under the liabilities section of your bookkeeping document. 

There are 3 areas in which you can report earnings on a balance sheet: 

• Capital stock: Investments of cash or other assets in exchange for common stock or preferred stock
• Paid-in surplus: Capital from investors in exchange for stock
• Retained earnings: Profits not distributed to shareholders as dividends but profits you'll reinvest into the business

Partner With Bookkeeping Experts

Creating a balance sheet is a crucial part of operating your business, but consider working with the pros if you need more help. If you're ready to take the next step, head over to our schedule a free call with our bookkeeping experts to assist you with the process.