How to Do a Balance Sheet Easy
How To Create a Balance Sheet (With Examples and Tips)
By Indeed Editorial Team
Updated November 10, 2021 | Published February 4, 2020
Updated November 10, 2021
Published February 4, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Balance sheets are fundamental financial statements for both accounting and financial modeling within an organization.
Regardless of the size and nature of a company, balance sheets can reveal crucial information, such as the organization's net worth, the amount of capital it has and where the capital is located.
Balance sheets help companies get an overall view of their business dealings, which can be helpful when securing a loan, looking for someone to buy out the business or when seeking new investors.
In this article, we describe what balance sheets are, explain how to create one and provide both a template and a sample to help you create your own.
What is a balance sheet?
A balance sheet is one of the most important financial statements a company has and examines a company's financial position at a certain point in time. This statement allows both the company's management and other interested parties to gain more information regarding what the company owns and what it owes to other parties at that specific date. Balance sheets are used to:
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Determine financial status for owners and management
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Communicate financial status to stakeholders and government agencies
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Forecast financial status and guide current financial decisions and strategies
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Benchmark and analyze financial history to determine trends and progress
Related: FAQ: Balance Sheets and Their Purpose
Components of a balance sheet
There are three major components to include in a balance sheet: assets, liabilities and owner's/stockholder's equity.
1. Assets
Everything the company owns is considered an asset, including those that can potentially be sold. Assets are also certain services that have been already paid in advance, such as prepaid advertising costs, legal fees, insurance and rent. Assets can be classified according to their liquidity, meaning the speed in which they can be turned into cash, sold or used directly and can be defined as "current" or "noncurrent."
Current assets
Any asset that can potentially convert into cash within a year is called a "current asset." The most common current assets are:
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Money in the company's checking account
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Short-term investments
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Inventory items
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Accounts receivable, which is the total amount of money currently owed by the company's customers.
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Prepaid expenses
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Cash, foreign currency, stocks, bonds
Noncurrent assets
Assets that potentially take longer to be converted into cash are called "long-term" or "noncurrent assets." The most common noncurrent assets are:
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Land and buildings
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Equipment and machinery
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Intellectual property, such as patents and trademarks
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Long-term investments
Read more: Assets on a Balance Sheet: What They Are, Why They Matter and Examples
2. Liabilities
Anything a company owes to a third party is called a "liability." Just like assets, liabilities are usually displayed on a balance sheet according to their due date.
Current liabilities
If liabilities are due within one year they are called "current liabilities." The most common current liabilities are:
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Accounts payable, which is the total amount of money owed to suppliers for various items that were bought on credit
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Wages owed to the employees for past work
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Loans that the company must pay back within a year
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Taxes owed
Noncurrent liabilities
Liabilities with a due date that is more than a year away are called "long-term" or "noncurrent liabilities." The most common long-term liabilities are:
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Long term loans that don't need to be paid back in full within one year
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Bonds issued by the company
Related: Complete Guide for Liabilities: Definition and Examples
3. Owner's/stockholder's equity
The owner's equity is the total amount of money that the company has at the time when the balance sheet is created. The term "owner's equity" is used for sole proprietorships, while corporations use the term "stockholder's equity."
The most common forms of equity are:
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Capital invested directly into the business by the owners
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Both private and public stock
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All the profits, meaning the difference between total revenue and total expenses, since the company's inception
Read more: What is Stockholder's Equity? Definition and Examples
How to create a balance sheet
Most balance sheets are based upon the following equation:
Assets= Liabilities + Shareholder's Equity
| Rockford Real Estate Balance Sheet June 30, 2021 (Q2) | |||
|---|---|---|---|
| Assets | Liabilities | ||
| Current Assets | Current Liabilities | ||
| Bank account | $3,500 | Accounts payable | $3,500 |
| Accounts receivable | $7,300 | Wages payable | $9,500 |
| Temporary investments | $5,000 | Taxes payable | $6,000 |
| Total current assets | $15,800 | Total current liabilities | $19,000 |
| Noncurrent Assets | Noncurrent Liabilities | ||
| Property | $47,000 | Bonds payable | $25,000 |
| Total noncurrent assets | $47,000 | Total noncurrent liabilities | $25,000 |
| Stockholders' Equity | |||
| Retained earnings | $15,000 | ||
| Common stock | $3,800 | ||
| Total assets | $62,800 | Total liabilities and stockholders' equity | $62,800 |
Using the above balance sheet as an example, here's how to create your own balance sheet:
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Establish the reporting date and period
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Find the total amount of assets
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Determine the number of liabilities
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Calculate the stockholders' equity
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Add equity and liabilities to compare to assets
1. Establish the reporting date and period
Crucial to an accurate balance sheet is determining the date of your financial report and for what period of time you are reporting. Typically, the reporting date is the last day of the reporting period. Most companies report on a quarterly basis and while several divide up their year slightly differently, the most common is according to the following quarter schedule:
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Q1: January 1 to March 31
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Q2: April 1 to June 30
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Q3: July 1 to September 30
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Q4: October 1 to December 31
2. Find the total amount of assets
Create an "assets" column on the sheet. List all of the company's current assets and their amounts under a section titled "Total current assets." Add them up and include the subtotal.
Then, list all of the noncurrent assets, add them up and include the subtotal under a section called "total non-current assets." Finally, add the two subtotals together and label the result as "total assets" at the bottom of the assets column.
3. Determine the number of liabilities
Similar to the assets section, create a liabilities column on the balance sheet. List all of the current liabilities and their individual amounts under the label "total current liabilities." You can then list the long-term liabilities and individual amounts under "total non-current liabilities." Finally, add the two subtotals of liabilities and label the results as "total liabilities" at the bottom of the column.
4. Calculate equity
To find the shareholder's equity and earnings, add the earnings to the equity. Once it has been calculated, it can be put on the balance sheet under the caption "total liabilities and stockholders' equity."
5. Add equity and liabilities to compare to assets
Now that all the elements of a balance sheet are in place, all that is left to do is calculate the totals. A complete balance sheet should have the total assets equal to the sum between total liabilities and total equity. If the two are not equal, check that every item is accounted for in the balance sheet.
Use the basic accounting equation for balancing
The balance sheet should conclude that the total sum of assets is equal to the sum of liabilities and equity. Use the following formula to determine your organization's financial health:
Assets= Liabilities + Shareholders' Equity
Balance sheet template
Here is a template you can use when creating your own balance sheet:
| Company Name Balance Sheet Date | |||
|---|---|---|---|
| Assets | Liabilities | ||
| Current Assets | Current Liabilities | ||
| Asset 1 | $ | Liability 1 | $ |
| Asset 2 | $ | Liability 2 | $ |
| Asset 3 | $ | Liability 3 | $ |
| Total current assets | $ | Total current liabilities | $ |
| Noncurrent Assets | Noncurrent Liabilities | ||
| Asset 1 | $ | Liability 1 | $ |
| Total noncurrent assets | $ | Total noncurrent liabilities | $ |
| Stockholders' Equity | |||
| Retained earnings | $ | ||
| Common stock | $ | ||
| Total assets | $ | Total liabilities and stockholders' equity | $ |
Related: A Guide To Comparing Balance Sheets
Source: https://www.indeed.com/career-advice/career-development/balance-sheet-example