by
Alina
A balance sheet is one of the key financial statements which every company prepares, often monthly, quarterly, or yearly, depending on their reporting schedule.
Of course, you can use an accounting software to automate balance sheet preparation and reconciliations. But if you’re a beginner and prefer to do it manually, read on to learn how to create a basic balance sheet.
What is a Balance Sheet?
A balance sheet is a summary of your company’s financial health. It shows what your business owns (assets), what it owes (liabilities), and what’s left for the owners (equity).
This document is helpful for investors, lenders, and even the company’s team to see how things are going financially. It also helps predict how the business might perform in the near future.
There are a few common types of balance sheets:
Classified: It groups assets, liabilities, and equity into categories.
Common Size: It adds a percentage column for easy comparison of trends.
Comparative: It shows side-by-side data from different periods.
Vertical: It lists everything in one column, sorted by liquidity.
Balance sheets also calculate important ratios. For example, the debt-to-equity ratio shows if a business can cover debts with equity. On the other hand, the current ratio checks if short-term assets can cover short-term debts within a year.
What is the Formula of a Balance Sheet?
Put simply, the balance sheet is your go-to tool for understanding where a company stands financially and how it manages its assets, debts, and equity to create value. It follows this basic formula:
Assets = Liabilities + Shareholders’ Equity
This equation ensures everything the company owns is balanced by what it owes and the value provided by its shareholders.
Let’s break down each component to understand what it includes.
Assets: They represent what the company owns or controls that have value and contribute to generating income.
Liabilities: They reflect the financial responsibilities the company must meet to keep running smoothly.
Shareholders’ Equity: This is the owners’ share of the company after all debts are paid. It shows the company’s net worth and is a key indicator of its financial health and potential for growth.
In layman’s terms, the balance sheet formula provides a clear and structured way to see how a company’s resources, obligations, and ownership are connected. Whether you’re an investor, lender, or business owner, understanding this formula helps you make smarter financial decisions and plan for the future.
How to Create a Balance Sheet in 5 Simple Steps
Let’s now walk you through the process of preparing a balance sheet, step by step.
Step 1: Choose a reporting date and period for your balance sheet.
To create a balance sheet, the first step is to pick a specific date, commonly referred to as the reporting date, and decide on the reporting period. This document lists all your assets, liabilities, and shareholders’ equity. They change with every transaction, so the balance sheet may look different each time you update it.
Most companies opt to prepare their balance sheets quarterly and choose the last day of March, June, September, or December as their reporting dates. For instance, if you’re creating a balance sheet for the first quarter, your report date would be March 31st and will cover data from January to March. Some businesses prefer monthly reporting, which means they would select the last day of each month as the reporting date. Deciding on the right period and date is important, as it sets the framework for collecting accurate financial data.
Step 2: Gather and list your assets.
After selecting your reporting date, the next step is to compile all your company’s assets. Assets cover everything your business owns or controls that holds value.
To make your balance sheet more understandable and give better insight into your company’s financial state, organize assets into two categories: current and non-current.
Current Assets
These are assets that can be turned into cash within a year:
Cash and cash equivalents
Short-term securities
Accounts receivable
Inventory
Non-Current Assets
These are long-term resources or investments your business holds for over a year:
Long-term securities
Property
Goodwill
Intangible assets
List each asset as a separate line item for better organization. Subtotal the current and non-current assets separately. Then, combine these subtotals to calculate the total assets for your business.
This structure not only simplifies your balance sheet but also provides a better understanding of where your company’s value lies and how it is distributed.
Step 3: Identify and list your liabilities.
After listing your assets, it's time to gather and organize your liabilities. Liabilities are what your business owes to others. To make things easier, group them into two main categories: current liabilities and non-current liabilities.
Current Liabilities
These are obligations your business needs to pay within a year:
Accounts payable (bills you owe to vendors)
Accrued expenses (expenses incurred but not yet paid)
Deferred revenue (payments received for services or goods not yet delivered)
Short-term debt
Current portion of long-term debt
Non-Current Liabilities
These are debts or obligations due after one year:
Deferred revenue (long-term)
Long-term lease obligations
Long-term debt (like loans)
Other non-current liabilities
After listing these items, subtotal the current and non-current liabilities separately. Then, combine these subtotals to calculate the total liabilities.
Step 4: Calculate shareholders’ equity.
After you’ve listed your assets and liabilities, figure out your shareholders’ equity: what’s left when you subtract your total liabilities from your total assets.
Shareholders’ Equity = Total Assets - Total Liabilities
Another way to calculate it is by adding up retained earnings and common stock. Retained earnings are the profits your business has kept for reinvestment instead of distributing as dividends.
For smaller businesses with a single owner, this calculation is straightforward. But if you’re dealing with a larger company, especially one that’s publicly traded, you might encounter extra items. Some common examples include:
Common stock
Preferred stock
Treasury stock (shares bought back by the company)
Retained earnings
Bigger companies may also list things like accumulated comprehensive income, but if you’re managing a smaller business, you can likely skip these details.
Once you’ve calculated shareholders’ equity, you’ll have a clear idea of your business’s net worth. It’s the final step to complete your balance sheet and an essential metric for understanding your company’s financial health.
Keep it simple, and remember: this section ties everything together to show how much value truly belongs to the owners.
Step 5: Add total liabilities to total shareholders’ equity and compare the sum with assets.
Finally, it’s time to make sure everything adds up. To make sure your balance sheet is truly "balanced”, you need to compare your total assets with the sum of your total liabilities and shareholders’ equity.
Here's how you can do that:
Add up your liabilities and shareholders' equity.
Compare the total with your assets.
Your total assets should always equal the sum of liabilities plus shareholders' equity. This is what gives the balance sheet its name. If the numbers match, congratulations—you’ve successfully created a balance sheet!
But if the figures don’t balance, don’t worry. This happens sometimes. Review your balance sheet for the following:
Missing or incorrect transactions
Mistakes in recording depreciation or amortization
Errors in currency exchange rate calculations
Problems with calculating shareholders' equity
Once you double-check these areas and correct any errors, your balance sheet should balance out perfectly.
Frequently Asked Questions
What is a balance sheet?
A balance sheet is a financial statement that shows a company’s assets, liabilities, and shareholders' equity at a specific point in time. It helps you understand what the company owns, what it owes, and the value left for shareholders.
What is the difference between balance sheet and income statement?
A balance sheet shows a company’s financial position at a specific moment and lists down its assets, liabilities, and equity. An income statement, on the other hand, shows a company’s performance over a period and includes revenues, expenses, and profits or losses.
What goes on a balance sheet?
A balance sheet includes assets (what the company owns), liabilities (what it owes), and shareholders' equity (the value left after liabilities are deducted from assets).
Which account does not appear on the balance sheet?
Accounts like revenue and expenses don’t appear on a balance sheet. These are found on the income statement. The balance sheet focuses on assets, liabilities, and equity, while income and expenses are tracked over time.
What is goodwill on a balance sheet?
Goodwill represents the value of a company’s brand, customer relationships, and other intangible assets when it’s acquired. It appears on the balance sheet when a company buys another for more than its fair market value, reflecting the extra value paid.
How are donations recorded on a balance sheet?
Donations are recorded as revenue or income on a balance sheet. They typically show up in the form of cash or non-cash assets, depending on the type of donation. They may also be added to equity if not immediately spent.
Describe an unclassified balance sheet.
An unclassified balance sheet is a simple financial statement where assets, liabilities, and equity are listed without any further breakdown into current or non-current categories. It’s less detailed than a classified balance sheet.
What is a classified balance sheet?
A classified balance sheet organizes assets and liabilities into categories like current and non-current. This helps users better understand the company’s short-term vs. long-term financial situation and liquidity.
How do you calculate retained earnings on a balance sheet?
Retained earnings are calculated by adding net income to the previous period’s retained earnings and subtracting any dividends paid. It represents the profits a company keeps to reinvest in the business instead of distributing them as dividends.
Is accumulated depreciation an asset?
No, accumulated depreciation is not an asset. It’s a contra-asset account that shows the total depreciation of an asset over time. It reduces the value of the asset on the balance sheet.
Why are balance sheet liabilities listed in order of maturity and assets in order of liquidity?
Liabilities are listed in order of maturity to show when they are due, helping assess short-term and long-term obligations. Assets are listed by liquidity (how easily they can be converted to cash) to show how quickly a company can access resources.
What is goodwill on a balance sheet?
Goodwill is the intangible value of a company, such as its brand reputation or customer relationships, that’s recorded when one company acquires another. It appears on the balance sheet when the acquisition price exceeds the fair value of the company’s net assets.
How are donations recorded on a balance sheet?
Donations are recorded as income or a contribution, depending on the type. Cash donations increase assets (cash) and are recognized as revenue, while non-cash donations may increase other asset accounts like equipment or inventory.
What does right of use mean on a balance sheet?
Right of use refers to an asset that a company has the right to use, like a lease. It appears on the balance sheet to reflect the value of leased assets, with the corresponding liability for future lease payments.
What happens if a balance sheet doesn’t balance?
If a balance sheet doesn’t balance, it usually means there’s an error somewhere in the data. This could be due to missing or incorrect transactions, mistakes in calculating depreciation, or errors in recording liabilities or equity. It needs to be corrected for accuracy.
