What is a Balance Sheet? – How to Create, Equation, and More
What is a Balance Sheet?
A balance sheet is one of the leading financial statements used for accounting and divides into two parts. On the left side, the assets of the company display. The right side shows the company’s liabilities and equity.
The items on each side in order of liquidity. The most liquid items (for example, cash and inventory) before the less liquid accounts (for example, factories, property, plant, and equipment).
It is a snapshot of the financial condition of the company at any given time. For example, an accounting period typically lasts 12 months.
Balance sheet items or accounts would reflect the number of assets and liabilities at the end of the accounting period.
How to Create a Balance Sheet?
1. Components you Need for their Functions
These are the items you need for your balance:
Assets include both current and non-current assets.
Cash and cash equivalents (for example, short-term government bonds, cash bills, and money market funds), accounts receivable, and inventories.
Property, plant and equipment, long-term investments, and intangible assets include patents and licenses.
Both current and non-current assets include in the liability portion of the balance sheet.
It accounts payable, bills payable in the year, and current long-term debt maturities.
Long-term obligations payable, liabilities, and obligations payable for deferred taxes and long-term debt.
- Stockholders’ Equity
Shareholders’ equity, also known as equity, includes:
The amount of money that a company obtains from its shareholders for business purposes.
The number of company earnings that not distribute to shareholders as dividends; the funds are reinvested in the company instead.
2. Determine the Reporting Period
- Since the central role in a balance sheet is producing reports, you will compile them on an ongoing basis, probably quarterly.
- And also, choose the date that you will compile the report. And also, it will be the date of the information.
- On the report’s date, you will be looking at the figures for a previous period, already resolved.
- And also, this period is called the reporting period.
- For example, if the reporting period is the first quarter (January 1 to March 31), the report date could be April 1 of the same year or another date as required.
3. Identify your Assets on the Date of your Report
- Organize your articles into two categories (current and non-current) and represent each article as a line article in the corresponding category.
- You will then subtotal your categories and add them up.
4. Identify your Responsibilities on the Date of your Reporting
- These will also represent individual order lines in the Current and Non-recurring categories.
- You will then get a subtotal and a total of these in the same way you did with your items.
5. Calculate the Equity
Next, you’ll want to incorporate the share capital you receive from investors, as well as any retained earnings. You may need to consider whether the following should deem to base on your situation:
- Common actions
- Preferred shares
- And also, Own actions
6. Compare total Assets with Liabilities and Equity
- On the balance sheet, assets are equal to liabilities plus equity.
- You’ll want your balance sheet to comprise this calculation to provide information about your financial data.
Equation of Balance Sheet
The balance sheet equation use to show what a business owns (assets), how much it owes (liabilities), and how much property or shares the business owners have (equity capital). And also, it calculates with the following formula:
Assets = Liabilities + Equity
Example of Balance Sheet
On the balance sheet, you can understand how assets, liabilities, and equity present. Here is an example showing the layout of a balance sheet:
1. Balance Template
Some balance templates that you can use to create your own.
- This Toggl template download can use in Excel to create your balance sheet.
- And also, download this QuickBooks Overview for Excel template.
Corporate Finance Institute
- This downloadable template uses from the Corporate Finance Institute to create a token balance for your business.
2. Common Size Balance
- The typical size balance sheet is a balance that includes another column specifically for the relative percentage of each row to total assets, total liabilities, and equity.
- And also, it is useful when analyzing the sector. You can compare the percentages of different companies.
- A standard size balance sheet does not require under generally accepted accounting principles (GAAP).
Analysis of the Balance Sheet
- The balance sheet is essential to determine the ‘ liquidity, leverage, and rate of return of a company.
- When current assets are more significant than current liabilities, the company can meet its short-term financial obligations and is probably in good financial condition.
- The term “leverage” is also used to describe the part of a company’s capital that comes from debt.
- But what is the impact of the balance sheet on a company’s leverage? The leverage ratios, debt ratio divide the shareholder’s liabilities to show the company’s indebtedness.
- Other calculations, such as return on equity and return on assets, can be calculated from the balance sheet’s financial information.
- These two formulas tell investors whether they will return on the money the company invests.
- And also, they can perform by examining the financial statements for two or more accounting periods.
- For example, if there is a significant percentage decrease in the company’s cash flow, you may experience financial problems, and it may not be wise to invest in the business.
It is one of three financial statements that provide an overview of your business’s financial condition.
If your business is doing well, savers can look at your balance sheet and see if you have a gainful business that they would like to invest in it.
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