Balance Sheet Explanation and Examples
In a previous lesson, we discussed the various items that are included in the balance sheet. However, if you’re a budding startup or a fairly young e-commerce venture, you might find it difficult to get started on preparing a balance sheet for your business. That’s why we’ve simplified the entire process for you, in several short steps, along with a brief analysis of what each section means and implies for your business.
Let’s break down everything you need to know about preparing balance sheets and how you can approach creating a basic version of a balance sheet for your own online business.
Quick refresher: why do you need the balance sheet?
Preparing a balance sheet is especially important for small businesses that seek funding from financial institutions or investors. Even if you own and possess limited assets and liabilities- which is usually the case of really small-scale businesses- it is always a good idea to be up to date on your financial statements.
Breaking down the balance sheet
In a nutshell, it is essentially a financial statement that depicts everything your business owns, owes, and retains at any given point in time. The balance sheet is organized into two sections, namely: assets and liabilities.
As a general rule, the total assets of your company should always be equal to the sum of liabilities and equity. In other words, they must balance out and the rallying figure for both should always be equal. This is called the accounting equation and forms the basis for balance sheet layout.
3 Major Stages in Preparing a Balance Sheet
Stage #1: Listing all assets
This is the essential first step. You need to list the value of all the assets you currently possess (even if you don’t necessarily own them). This will include cash-in-hand, accounts receivable (customers that haven’t yet paid), the equipment you use (printers, computers, another tech), vehicles (delivery vans) supplies, inventory (the closing stock you have in hand), prepaid items (insurance) and also building or land.
All of the above-mentioned items can be considered your assets. The following example shows you how they will be listed in your balance sheet.
Stage #2: Listing all liabilities
Once you’ve listed all your assets, proceed to gather all your liabilities and list them out. This will include business credit cards, loans received by the business, money owed to the vendors and suppliers, etc.
Note that liabilities will include both short-term and long-term liabilities.
Stage #3: Calculating owner’s equity and ensuring balance
Finally, you need to calculate the difference between your assets and liabilities, which amounts to what’s called owner’s equity. You also need to make sure the resulting sum or amount on both sides is equal.
Now that we’ve covered the major stages in this process, let’s walk you through it step-by-step:
Step-by-Step Breakdown of how to prepare a balance sheet
Even though a lot of accounting processes are automated through software these days, having a general framework for the way you prepare a balance sheet can help you spot errors and resolve them sooner before they cause any lasting damage to your business.
Determine the Reporting Date and Period
Start by fixing the reporting date and the reporting period. Typically, the reporting date will be the final day of the reporting period, which could be a month, six months, or a year. Publicly traded companies generally report at the end of every quarter, which falls on March 31, June 30, September, etc.
Pick at your own discretion
If you plan to report on an annual basis, then you might choose December 31st as your reporting date. However, you can actually pick any date and all that matters is you cover assets and liabilities for the entire accounting period you’ve determined.
The initial line should be the company’s name. The second line can show the nature of the document (balance sheet or statement of financial position). In the third line, you can mention the date of the report.
While income statements generally use “For the year ended/for the month ended etc. as the title, this wouldn’t be appropriate for the balance sheet since it is presenting information relevant to a particular date. You may use “As of… “ and add the date. However, some might choose to omit this phrase entirely.
Start with assets
The next step is to tally all your assets as of the fixed reporting date. First, you need to list them individually and then tally the total assets. Separating your assets into different line items helps you identify the nature of each asset and where it came from.
The following are the different line items that are generally included in assets and the sections they fall under.
- Current Assets:
- Cash in hand
- Short-term securities
- Accounts receivable
- Inventory(stock in hand)
- Long term securities
- Land or property
- Intangible assets (eg: patents)
It would be a good idea to subtotal current assets before you total them. Example:
Move on to your liabilities
Just like what you own and possess in value, you need to know what your business owes. The following are some of the items that are typically included in the liability side:
- Current liabilities:
- Accounts payable
- Accrued expenses
- Deferred revenue
- Long term liabilities
- Long term debt
- Long-term lease obligations
Calculate Shareholders’ Equity
Once you have a fair picture of your assets and liabilities, ascertain the difference between them. This will be the shareholder’s equity. Since online businesses are generally privately owned, you need only estimate the dividends and retained earnings (amount reinvested into the business)
Compare total assets and liabilities
In order to make sure that the balance sheet is evened out, you have to compare total assets to the sum of liabilities and shareholder’s/owner’s equity, as mentioned earlier. The following is what the finished balance sheet would like.
Some balance sheets will include the opening stock and value at the start of the accounting year, for better comparison. Assets and Liabilities can be listed horizontally as well.
Here’s an example of the finished balance sheet:
There you have it. The balance sheet we have just prepared is for a sole proprietorship business. In a partnership, several capital accounts will have to be presented – one for each partner. In a corporation, the capital portion is known as stockholders’ equity and is made up of capital stock, reserves, and retained earnings.