How to Prepare a Balance Sheet
The Most Important Financial Statement for Any Business
One of the important elements of financial statement analysis is the balance sheet. The balance sheet shows your assets or what you own, your liabilities or what you owe, and your owner’s equity, which is yours and your partners' investment in the small business.
The first thing you have to get up to speed on is the financial statements that you or your financial professional will generate for your business.
These financial statements will help you determine your firm's financial position at a point in time and over a period of time as well as your cash position at any point in time. Many small businesses fail because the owner loses a grip on the firm's financial position. If you understand financial statements, that won't happen to you.
Below is a guide for preparing a balance sheet.
- Line 1 is the firm’s cash account. Small business firms must keep some cash on hand for day-to-day transactions. Business firms also need to keep cash on hand for emergencies and to take advantage of any bargains they might find in the marketplace.
- Line 2, accounts receivable, represents what your credit customers owe you if your firm extends credit. Since the balance sheet is like a snapshot of a firm’s financial position at one point in time, the figure for accounts receivable and all the other accounts is accurate for the day on which this financial statement was developed.
- The value of the firm’s inventory is stated on Line 3. Inventory is simply the products the firm has for sale. It can be valued using a number of different methods. Two commonly-used methods are called LIFO (Last In First Out) and FIFO (First In, First Out), which are accounting methods that involve the amount of money a company has in inventory.
- The last asset on the sample balance sheet is fixed assets. This asset is stated on Line 4. Fixed assets include any equipment and vehicles you own and any land and buildings you own. These assets normally refer to the large and highly valued assets that are owned by your business firm and those that can be depreciated over time.
- The value of the asset accounts is totaled and stated on Line 5. Total assets are the value of everything your firm owns.
Liabilities and Equity
Liabilities are the debt your firm owes to its creditors.
- Line 6 lists accounts payable, which are the short-term credit accounts that you owe your suppliers.
- Line 7 shows any long-term bank loans or loans from other sources that you’ve taken out with a maturity of more than a year. You may have had to use long-term loans in order to keep your firm solvent.
- Line 8 shows the amount of owner’s capital that has been invested in the firm. This is the money that the owner and any other investors have put in the firm.
- The last line, line 9, totals the amount of liabilities and equity. This is the total amount the firm owes plus the owners’ investment in the firm. The total of the liabilities and equity must equal total assets as the firm can’t own more than it owes.
Balance Sheet Example
|XYZ Company Balance Sheet|
|Liabilities and Equity|
|6.Accts Payable||$ 180,000|
|7.LT Bank Loans||240,000|
|9.Total Liab & Equity|