Use our guide to learn the importance of balance sheets for small businesses. Learn how to format your balance sheet through examples and a downloadable template.

A balance sheet, along with an income statement and cash flow statement, is an integral part of your financial reporting. It will give insight into what your company owns and what it owes.

No matter the size of your business, keeping financial reports is an important aspect of managing your company. Use the data found in your balance sheet to make more informed decisions. In fact, research has shown this can lead to an increase in marketing productivity by 15% to 20%.

Plus, when your balance sheets are paired with your accounting software it allows you to have a complete picture of the health of your company.

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What is a Balance Sheet?

Balance sheets are one of the primary financial statements used to measure a company’s financial position. It summarizes the company’s assets, liabilities, and owners’ equity at a specific date, and it is used to calculate the net worth of the business.

Understanding your company’s balance sheet is vital to ensuring it has a strong financial position.

Typically, when assets are greater than liabilities, this represents a strong financial position. But when liabilities are greater than assets, this can represent a weak financial position and a company with lower value.

Having an accurate balance sheet can help you and your managers assess the company’s strengths and weaknesses and develop appropriate strategies moving forward. Balance sheets can help you identify trends and are commonly used when dealing with potential lenders, such as banks, investors, and suppliers.

There are two other financial statements that are connected to the balance sheet:

• An income statement reports revenue, expenses and net income for a specific period of time. The net income balance in the income statement increases an owner’s equity in the balance sheet.
• A cash flow statement lists the cash inflows and outflows for a month or year, and the ending cash balance is the same dollar amount reported in the balance sheet. If you create a June cash flow statement, for example, the June 30th cash balance in the cash flow statement equals the cash balance in the June 30th balance sheet.

Get a complete picture of your business finances, and in real-time, with QuickBooks financial reports.

Putting together your first balance sheet can seem a little overwhelming. But with the help of a template, you’ll not only have it done quickly but accurately. This balance sheet template can be downloaded and used for any type of business!

Before you fill it in here is a breakdown of the different sections in a balance sheet:

Assets

Assets include all items of cash and property held by your company. Usually, assets on the balance sheet are divided into categories, here are the main categories assets can be distinguished by:

• Liquid vs. non-liquid assets: Liquid assets can be quickly converted to cash, usually within a year or less. Inventory (including raw materials) and cash equivalents are examples of liquid assets. Non-liquid or long-term assets are those that can’t be easily converted into cash, and to do so would cause loss on investment. Land and real estate are good examples of non-liquid assets. Liquid and non-liquid assets can also be referred to as current and fixed assets.
• Tangible vs. intangible assets: Tangible assets are physical assets that the company owns, such as land, buildings, and inventory. Intangible assets are intellectual property that hold future value. This can include assets like your domain name, patents, and trademarks.
• Operating vs. non-operating assets: Operating assets are those that are necessary for regular business operations—this is how most assets you’re familiar with are categorized. Then there are non-operating assets that are non-essential to regular business operations but still generate income or provide return on investment. Unused land and equipment are examples of non-operating assets.

Examples of assets include:

• Cash, such as money in petty cash, deposits in checking and savings accounts, and any short-term investments that can readily be converted into cash.
• Marketable securities, including stocks, bonds, and other securities held for investment that are readily tradable.
• Accounts receivable (A/R) owed to your company by a customer or client that is expected to be paid within a year.
• Inventory, including raw materials, works in progress, and finished goods produced or acquired for sale to customers in the normal course of business. Businesses may have an obsolescence reserve that reduces the inventory asset on the balance sheet.
• Pre-paid expenses, such as amounts for insurance coverage or other expenses that you expect to use or apply within one year.

Non-current assets include:

• Property, such as equipment and machinery, buildings and land, and furniture and fixtures.
• Intangible property, including copyrights, patents, and trademarks, as well as goodwill.

Liabilities

Liabilities are debts or other obligations of the company that could have a negative effect on its net worth. There are two basic categories of liabilities: current liabilities and non-current (fixed) liabilities.

Current liabilities are short-term debts—generally meaning they can be paid off within the year. They include:

• Accounts payable (AP) owed to suppliers and suppliers for goods or services bought by the company.
• Accrued expenses incurred by your business without any invoice, such as wages, employee benefits (e.g. medical insurance, retirement plan contributions), and federal and provincial taxes
• Short-term borrowing, which includes company credit card bills and lines of credit.
• Unearned revenue from a product or service that has yet to be delivered or performed.

Non-current (fixed) liabilities are long-term debts—those that cannot be paid off within the year. Deferred tax liabilities, bonds payable, and pension benefits you’ll owe employees are examples of non-current liabilities. Non-current liabilities are often referred to as long-term liabilities. They include:

• Mortgages taken out to buy or build the company’s facilities (e.g. buildings, factories, etc.)
• Other loans for company vehicles, equipment purchases, and loans from shareholders.
• Bonds issued by the company to raise capital (this type of liability is unusual for a small business)

Owners’ Equity

This portion of the balance sheet represents the value of your owner’s interest in the company. Subtracting the liabilities from the assets gives you the value of your equity.

Owners’ equity breaks down into three basic categories:

• Capital that owners initially put into the business
• Additional paid-in capital that owners add to the business after the initial funding
• Retained revenue, or the earnings of the business that are kept in the company rather than being distributed to the individual owners

If you have positive equity, your assets exceed your liabilities. If your equity is negative, there are more liabilities than assets, and the company could be in trouble.

Balance Sheet Formula

Those three components are connected by the balance sheet formula:

Assets = Liabilities + Owners’ Equity

Or

Owners’ Equity = Assets – Liabilities

The formula is used to create the financial statements, including the balance sheet and will give you an accurate snapshot of your company’s financial health.

Importance of Balance Sheets and How to Use Them

The balance sheet is meant to give you a clear view of what your business owes and owns. The insights you can gain from the balance sheet—along with other financial statements—allow you to make informed financial decisions as your business grows.

There are several ways to utilize balance sheets, such as:

1. Determining your business’s ability to meet current financial obligations or defining your working capital. To do this, you will need to know your company’s current ratio and days cash on hand.

a. Current ratio is a key financial ratio that will provide insight into whether you can meet your short-term debt payments. Calculate current ratio by dividing current assets by current liabilities: Current ratio = current assets/current liabilities. Preferably, you want your current ratio to be 2.0 or higher.

b. Days cash on hand tells you how many days’ worth of expenses you can cover given your current financial position. Days cash on hand = (cash + marketable securities) / ((operating expenses – non-cash expenses) /365)

2. Comparing year-over-year or period-over-period. Doing so allows you to see how your financial circumstances have changed and identify areas for opportunity and improvement.

3. Determining your business’s net worth if you intend to sell. Not only will you need to know this figure, but potential buyers will want to know—and have the proof to back it up.

4. Applying for credit. Lenders will want to verify that you are able to pay back your debts.

5. When completing your taxes or providing financial information to regulatory authorities. In some cases, businesses are required to submit their balance sheet and other financial statements for tax purposes.

How to Create a Balance Sheet

To create a balance sheet manually, use two columns for entries of the items discussed earlier. The left column is for listing your assets, with a total of assets at the end of the column. The right column is for listing liabilities, which you total and add to the owners’ equity. When the sum of liabilities and owners’ equity is totalled, the amount should be equal to the total amount of assets in the left column.

For example, say you run an ice cream shop. Your current assets might include $2,000 cash in the bank plus $500 in accounts receivable for an upcoming catering gig and $3,000 worth of inventory (ice cream, cones, spoons, and the like). Your fixed assets might include tables and chairs worth $500, and $7,000 in freezers, and $1,000 for your computers and point-of-sale equipment. The numbers on the asset side of your balance sheet look like this:

($2,000 + 500 + 3,000) + ($500 + 7,000 + 1,000) = $14,000

The right side of your balance sheet shows your liabilities. Your current liabilities might include $1,000 in accounts payable for more ice cream and supplies, $500 for sales tax, and $1,500 owed in salary and wages to your employees. Your long-term liabilities might include $4,000 outstanding for a business loan you took to start the company. The numbers on the liabilities side of your balance sheet look like this:

($1,000 + 500 + 1,500) + 4,000 = $7,000

When you subtract your liabilities from your assets ($14,000 – 7,000), the remainder ($7,000) is your owners’ equity.

FAQs

How do I make a balance sheet?

Balance sheets are typically created in spreadsheets. To create a balance sheet manually, start with two columns for entries – one for categories and subcategories and one to the left that will show total amounts. Categories include assets, liabilities, and owners’ equity. Plug-in the formula above and fill in the form with your company’s information.

We’ve made it super easy to start a balance sheet with our downloadable template!

How do I read a balance sheet?

A balance sheet consists of rows and columns that list a company’s assets, liabilities, and equities. One column will list the category of assets or liability, with a second column beside it with the total amount for each of those categories. Underneath the assets and liabilities is data about the owners’ equity, which also includes a column of categories and total amount.

The balance sheet is then balanced through the formula Assets = Liabilities + Owners’ Equity. Ideally, a company’s assets should be equal to its liabilities and equity.

What is included on a balance sheet?

There are three categories that are included on a balance sheet: assets, liabilities, and owners’ equity.

What is the difference between classified and unclassified balance sheets?

An unclassified balance sheet provides minimal information, only presenting totally balances for assets, liabilities, and owner’s equity. While classified balance sheets breakdown assets, liabilities, and owners’ equity into subcategories. Classified balance sheets tend to be more popular because they provide more detail to the financial statement reader.

What is a report form?

A report form refers to a balance sheet that presents a fiscal year in one column. It starts with assets and provides a total value of assets at the end of the section, followed by liabilities, equities, with the final section totalling up the combined value of liabilities and equity.

How is report form and account form balance sheets different?

The difference between a report form balance sheet and account form balance sheet is simply how it is presented.

An account form balance sheet is presented in a horizontal format with information in two columns beside each other, benefits include its readability when you’re presenting data over multiple periods and it allows for quick verification that the ledger is in balance.

The report form balance sheet is presented in a vertical variation and is essentially one column that spans the entire width of the page. The benefits of using a report form balance sheet include its ability to showcase the fiscal year in one report.

Download Your Balance Sheet Template Today

Balance Sheet Template

Keep in mind that your balance sheet is an always changing document. You will need to fill out a number of them each year. It should be customized to include the specific asset and liability categories that apply to your company.

The example balance sheet will help guide you through the process. You can change the account titles and the amounts listed in the spreadsheet to fit your needs. You can also add rows, in order to add new accounts and balances. The total amounts will automatically populate, based on the embedded formulas.

You’re That Much Closer to a Healthy Business

Creating and keeping your balance sheet up to date will allow you to have a better handle on your company’s finances. Using the included template along with other financial reporting can help you manage debt, help you determine risks and returns, and it can be used to help you secure loans and other capital.

Download the template to start your journey to great business health.

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