A balance sheet is an essential tool for businesses of all sizes as it tracks how your business earns and spends money over a certain period. Your balance sheet also gives investors and potential investors insight into your company’s operations.
Before you create your balance sheet, here are a few helpful things to know.
What Is a Business Balance Sheet?
A business balance sheet is a statement of financial position. You’ll use balance sheets to track your company’s assets, equity, and liabilities to determine your company’s net worth.
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:
- Determining the reporting date and period
- Calculating assets
- Calculating liabilities
- Calculating shareholder equity
- Comparing equity and liabilities to assets
First, you’ll determine the reporting date. For many companies, this is typically the last day within a fiscal quarter. For companies that report their earnings annually, this is usually December 31.
Second, 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.
Third, you’ll calculate your liabilities, both current and long-term, by summing up the amounts.
Fourth, 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.
Finally, 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.
Why Do You Need 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 Does a Balance Sheet Include?
A balance sheet includes four things:
An explanation of each element of a balance sheet follows below.
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 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 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 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
Work With the Professionals
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 bookkeeping services for more information.