How to prepare a balance sheet in 5 steps

An important tool for financial analysis of your business, the balance sheet is one among many things to master as a small business owner. Being able to do so will give you a clearer picture of your business’s financial situation and enable you to make better financial decisions in the future. Creating a good and accurate balance sheet however isn’t just a matter of writing down a few monthly figures and projections. It requires a trained eye over many aspects of your business to ensure this method of financial analysis does its job. To help you get started with your first balance sheet efficiently, we’ve put together a post on how to prepare a balance sheet. We’ve also included definitions and explanations for a total understanding of the purpose and structure of a good balance sheet. 

A balance sheet is a report of your company’s financial situation. It assists with financial planning in the coming months and allows you to check the value of your shares at the time. Along with the income statement and cash flow statement, it is one of the three essential financial statements every business owner needs to generate in order to fully understand the current situation of their business. Think of each statement like walls in a home—you wouldn’t call the house complete if a wall was still missing. Your balance sheet will show you what your business owns, what it owes, and what it has invested in it. The most crucial aspect of the balance sheet is in the name: you want your assets to be balanced with your liabilities and equity. If you complete a balance sheet and it is unbalanced, you have made an error in your calculations somewhere. 

By providing for yourself a picture of your financial situation, you can make financial decisions with more clarity and confidence. For instance, if you wish to make a short-term purchase on some office supplies, you will want to make sure first that your company’s assets exceed its liabilities. 

Your balance sheet will be comprised of three aspects: assets, liabilities, and shareholders equity. It is the balance between these three things that makes up a balanced balance sheet. Let’s take a look at each aspect in detail:

Any resource with economic value, your assets are what your company owns. They can be sold, held while they appreciate in value, or taken during liquidation or insolvency. Assets are generally intended to generate cash flow later on, should nothing happen to your business that would get in the way of this. Common assets include: 

On your balance sheet, the value of your assets now and in the future will be compared against the two remaining aspects of a typical balance sheet. 

Your liabilities offset your assets. They are anything your company owes, instead of owns. Letting your liabilities outweigh the value of your equity and assets will cause your company to lose its financial stability. Liabilities include:

Your company’s shareholder equity determines its net worth. It is the accumulated value of the shareholders, including you and anyone else who owns stock in your company. If you run a sole proprietorship, your shareholder’s equity is referred to as ‘owner’s equity’ because you are the sole owner of its shares. Shareholders’ equity is calculated after accounting for assets and liabilities.  

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The whole point of a balance sheet is to balance. Your company’s assets will equal its liabilities when they are added to any issued shareholder’s equity. If you end up with an unbalanced sheet, it could be due to one of these mistakes: 

With the definitions out of the way, it’s time to put together your balance sheet. These five steps will take you through the crucial steps towards creating an accurate balance sheet and a useful picture of your company’s financial situation at that time. 

Because your balance sheet is designed to determine your financial situation at a specific date, the first thing you need to do is determine the reporting date and period of time. To do this, ask yourself if you would like to report on a quarterly, annual, or bi-annual basis. These are the most common periods on which to perform financial analysis. The final date of your chosen time period will be the day you create the report, but if you would prefer you can choose one of the final days of the year’s quarters: 

Having decided on your reporting date and period, it’s time to count your assets up to and including that date. List your assets in two separate categories: individual items and total assets. This will assist analysts in making sense of your balance sheet by helping them clarify what your assets are and where they’ve come from. Your individual assets will be split into two categories: Current and non-current assets.

You will also split your liabilities into two similar categories, which are Current Liabilities and Non-Current Liabilities.

Calculating shareholder’s equity is easiest for sole enterprises, because you as the owner would only need to count your own. The same is true if your equity is privately held, because it will likely be only a few investors. Things can get slightly more complicated if you have publicly held shareholders’ equity.Common stock types include:

Ensuring the sheet is balanced means comparing the total assets with the combined total of liabilities and shareholder’s equity. What you are doing is determining the value of your assets against the things which could potentially detract value from your company’s worth. 

Laid out in these five steps is how to prepare a balance sheet that will provide an accurate picture of your business’s financial situation. The most important thing with many of these financial assessments is to take them step by step, rather than panicking at the overwhelming amount of work ahead of you.