Creating a balance sheet

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The three core elements of the balance sheet are assets, liabilities and equity. The financial statement has two sections that need to be balanced, hence the name ‘balance sheet’. Your balance sheet is one of three critical statements that indicate your business’s financial performance, the other two being the cash flow and income statements.

The balance sheet is organised into two sections: The assets section and the liabilities and equity section.

The assets section includes everything the business owns, such as cash, accounts receivable, property and equipment. The liabilities section includes everything the company owes, such as accounts payable, accrued expenses and loans.

Once a company’s liabilities are subtracted from its assets (money owed - money owed), the leftover amount is known as ‘shareholder equity’. This is the amount of money that belongs to the business owners. Altogether, the balance sheet provides a snapshot of a company’s finances at a single point in time.

The balance sheet must always ‘balance out’. This is because the amount of finance left over after a business’s liabilities have been subtracted from its assets always belongs to the business owners (equity).