A balance sheet is commonly called a “snapshot of a company’s financial condition”. It is a statement of the company regarding its financial position or its net worth or in simpler words a statement regarding the company’s spending and earning. There are three important financial statements in a company namely income statement, cash flow statement, and balance sheet. It is expected to carry details regarding the company’s assets, liabilities, and owner/shareholder’s equity; but there might be additions to this, depending upon the need and want of the business. A standard company balance sheet generally has two main heads:
1. Assets (what the company own)
2. Liabilities (what the company owe)
Assets = Liabilities + Equity
The above two heads must be an equal ratio for a balance sheet to be ideal otherwise it depicts that the company’s financial position is unstable which might even lead the company into bankruptcy. The ‘equity’ which we see above in the equation, is the amount or the money which the company owes to its shareholders. The difference between the assets and the liabilities is known as ‘equity’ or ‘net worth’ or ‘capital’ of a company. According to the accounting equation, net worth must equal assets minus liabilities.
Balance Sheets are usually calculated after every quarter, six months, one year, or one for each business transaction. A balance sheet sometimes may also carry details from the last year along with the current year, which makes the comparison between two consecutive years easier, it is called a comparative balance sheet.
Let’s dwell a little upon what are the three main things that form the equation of a balance sheet:
1. Asset – These are the things or resources which the company owns. There are two kinds of assets the first one is ‘current asset’ and the other one is ‘non-current asset’.
- Current Assets: – These are also known as liquid assets with a lifespan of one year or less. They can be liquidated and turned into cash easily. Current assets include cash, accounts receivable (the amount owed to your company by customers), inventory (company’s work in progress), and prepaid expenses.
- Non-current Assets: – These are non-liquid assets with a longer lifespan than a year. They cannot be liquidated easily and converted into cash. These are the company’s long-term investments such as property, equipment, vehicles, etc. Non-current assets might also include intangible assets such as patents, contract, copyright, and goodwill
1. Liabilities– These are the obligations or the duties the company owes to the outside parties (e.g. customers and creditors). They are also divided into two categories, one is ‘current liability’ and the second one is ‘non-current liabilities’ or ‘long-term liability’.
- Current Liabilities: – these are the obligations that the company has to discharge within a term of one year. They might include the debts which are due within one year, such as account payable, short-term loans, current portion of long-term loans, taxes payable, wages, rents (of building and equipment), utilities, etc.
- Long-term Liabilities: – these are the obligations or the long-term debts of the company which is to be discharged after a term of one year. Long-term liabilities may include deferred income tax (tax due on the increase in value of an investment), bank debts, principal on bonds, and any pension fund liabilities.
2. Equity- when liabilities are deducted from the total assets, equity is all that is left. When the company is a sole proprietor “owner’s equity” is used in the balance sheet and when the company is a corporation “shareholder’s equity” is used. It is also called the book value of the company. Equity includes capital stock (the amount invested by the owner or the inverters/shareholders) and the retained earnings (money used to pay the debts or reinvest in the business for the growth and expansion purpose). We can say that equity is a residual of the company after subtracting the liabilities from its assets.
Balance Sheet an Essential for Business Today
New investors and creditors before investing in a business sure would like to know about the profit and loss ratio of the company. No one would willingly invest in a business that is performing poorly or which might soon end up bankrupt. The point being made is that a prudent man would analyze a company/business’s financial position before investing in it and this is where the balance sheet comes handy. Financial stability and business performance are assessed through balance sheets by the investors and to infer as to how efficiently the company can use its resources and assess the value of their investments.
Just as much as the balance sheet is important to the outside investors, it is equally essential for the smooth running of the business. It helps the business to keep a track of their finances so that they know the areas which need attention, to know the best ways to meet their financial obligations, and to decide whether the business needs additional debts/loans or not. Balance sheets are also required because it is only through these documents that the bank ascertains if you are qualified for the loan or not.
Balance sheets can be used to track the company’s growth or downfall, whichever is the case. By comparing balance sheets of different years one can understand the growth or fall of the entity. It helps the company to meet the unforeseen expenses. Preparing balance sheets is optional for sole proprietorships and partnerships, which is not the case with companies. Nevertheless, a balance sheet is useful for monitoring the health of the business.
Balance Sheet for Excel Format
There are different types of balance sheet formats today. Common formats are the vertical balance sheet and horizontal balance sheet, but there are other formats as well, such as classified, common size, or comparative balance sheets. It is up to the companies or the individuals to select the format which best suits their taste or which they find easier to read and manage.
1. Horizontal balance sheet: in these two tables are formed. The assets appear on the left-hand side and liability plus equity appears on the right-hand side.
2. Vertical balance sheet: in this format, again there are two tables but they are one underneath another. The assets are listed in the first list and under the list of assets there is liabilities plus equity list.
The advantage of creating a balance sheet in excel is that it provides formulas and readymade tables which not only saves labour but reduces the risk of calculation mistakes as well. In an Excel spreadsheet, there are endless rows and columns which can be selected as per the users need (depending upon the choice of format). And each row or column contains cells, here we can enter our data along with the formula and in seconds we will get the desired result we need.
Excel Spreadsheet provides its users with a template balance sheet that can be used in small businesses for accounting purposes. There are endless rows and columns in an excel spreadsheet. The first thing you have to do is decide whether you want to formulate a vertical balance sheet or a horizontal balance sheet or a comparative balance sheet or any other. Once decided then the next step is to select columns and label them accordingly. There are generally two lists (assets and liabilities) in a balance sheet that contain two columns each, irrespective of the format. The asset’s list will carry the names of the assets of the company in the first column and side by side the figures or the value of those assets in the second column. The list of liabilities is also prepared similarly. One can also insert additional columns and rows in the balance sheet if they wish to.
|Current Assets||Current Liabilities|
|Total Current Assets||=10000||Total Current Liabilities||=1500|
|Fixed Assets||Long-term Liabilities|
|1.||Land and buildings||13000||1.||Mortgage||9000|
|Total Fixed Assets||=19000||Total Long-term Liabilities||=11000|
|TOTAL ASSETS||=29000||TOTAL LIABILITIES AND CAPITAL||=29000|
“Horizontal Balance Sheet Format”
To create an excel balance sheet, one has to be acquainted with the basic functions or formulas involved in its creation. There are generally three formulas involved which go into the making of an excel balance sheet viz, ‘Excel Addition Formula’, ‘Excel Subtraction Formula’, and ‘Sum Function’. We can better understand these with the help of illustrations.
For instance, we want to enter the total value of the company’s land property in one cell and there are three properties, for that we will use the Excel addition formula. Type = followed by the value of first property + second land property + third land property and the cell will show the total sum of all.
And if the values are already mentioned in the spreadsheet then cell reference can be used instead of entering numbers in the cells.
Similarly, the difference can be calculated by the excel subtraction formula by replacing + operator to – operator, in the formula. This formula is used when we have to calculate owner/shareholder’s equity, or when we have to find the difference between two figures in a balance sheet.
The sum function in excel is used when we wish to perform additions without using the + operator. Instead of using =2000+3000+6000, you can use =SUM followed by the reference to two or more of the cell numbers in brackets.
A cell reference is a much quicker way of getting the calculations done especially when big figures are involved.
Large to small businesses, public to private companies, sole proprietors, partnership firms, and even individuals (for personal use) recognize balance sheets as an essential tool to keep track of the financial spending and earnings. Excel balance sheets templates help them even further by reducing the workload and by proving to be efficient time-wise.
- Companies, both public and private, are required to keep the profit and loss statement and balance sheets according to the 2017’s Amendment to the Companies Act 2013. The format is provided by the legislature of India according to which both these financial statements are to be prepared; these are contained in the new Schedule III.
- Sole proprietors and partnership firms are not required by law to maintain balance sheets but it is only wise to keep one. Even though it is optional, most of the firms and sole proprietors hire accountants to keep regular track of their balance sheets along with other important financial statements.
- Individuals maintain balance sheets mostly as a part of self-discipline. A balance sheet helps in organizing the expenses and let the person know how much he can spend on one particular head of items or what are his assets and liabilities. It is popularly said that a good habit goes a long way, and a person who keeps up with his financial health is less likely to go broke at the end of each month.