In this essay we’ll be deconstructing what a balance sheet is, and how to make and maintain your own.
There are three essential components that need to be listed on a balance sheet: assets, liabilities, and owner’s equity. Assets refer to what your business owns and their financial worth. Conversely, liabilities are what your business owes and how much. Finally, owner’s equity reflects the financial investments of yourself and any business partners you may have. This may all seem simple enough, but it can be difficult to know exactly what to write down on a sheet and how to categorize it. Moving through the categories one-by-one, you’ll learn exactly how to format your balance sheet.
Assets should always be listed first on your balance sheet.
- Business’ cash account. Most businesses have cash on hand either to facilitate day-to-day transactions (any business with a storefront, for example) or they have cash on hand for emergency scenarios or situations where other forms of currency simply won’t suffice.
- Accounts receivable, which is money owed to you by customers and clients. Obviously, this number will always be in-flux as you receive money from these individuals, or they accrue even higher debts with your business. The number reflected on you report is only expected to be accurate for the day it was created and by no means do you need to keep it up-to-date on a daily basis.
- Inventory – the current value of the products you sell based on their market value and the quantity you possess.
- Fixed assets are things your business owns and uses for operation including land, buildings, vehicles, and equipment. The nature of fixed assets is that they are generally big-ticket items; you don’t need to list every pencil and sheet of paper your company owns. Keep in mind that fixed assets generally depreciate over time. You can’t expect a company vehicle to hold the same value after several years of use, after all.
All of your assets will be totaled, which is the total value of everything your business owns.
This category is far less pleasurable to tally up than the previous one but still utterly necessary.
- Accounts payable – the polar opposite of accounts receivable. It represents short-term debts you have with any suppliers or manufacturers you work with. Much like accounts payable, these fluctuate frequently are only expected to be accurate as of the day you publish your balance sheet.
- The total amount of loans you’ve taken out. Unlike accounts payable, these are long-term debts, often from a bank that last for more than a year. Many businesses use loans to stay afloat or to accommodate expansion.
Equity is listed in the same category as liabilities as it is money invested into the business. It shows how much money has been invested by the owner as well as any other investors with a stake in the company. Both liabilities and equity are summed up. If the numbers are not balanced, then your balance sheet is not correct.