In this article, you will learn:
- What is a Balance Sheet and How Do You Prepare One?
- Overview: Balance Sheet Definition
- How Does the Balance Sheet work?
- Do I Need a Balance Sheet?
- How to Read a Balance Sheet?
- The Role of the Balance Sheet in Financial Statements
- The Balance Sheet Formula
- Elements of the Balance Sheet
- Example of a Balance Sheet
- How To Create Balance Sheets For Your Small Business?
- Balance Sheet Report By QuickBooks
- Restore a Deleted Balance Sheet Account in QuickBooks
- FAQs on Balance Sheet Template
The Financial Accounting Standards Board (FASB) has formulated certain widely accepted rules, standards, or procedures for companies to report accounting information. These are called Generally Accepted Accounting Principles (GAAP) that are used by companies to prepare financial statements to record and report accounting information.
As per GAAP, every business entity is required to prepare the Balance Sheet at the end of an accounting period along with the other fundamental financial statements. These include Profit and Loss and Cash Flow Statement.
Such financial statements provide useful information to both internal and external stakeholders regarding financial soundness, performance, and changes in the financial position of a business entity.
Thus, a simple Balance Sheet gives a true and fair view of your business’s financial position.
In this article, we will learn a simple balance sheet definition, how a balance sheet works, balance sheet formula, balance sheet template, elements of the balance sheet, and how to make a balance sheet template.
What is a Balance Sheet and How Do You Prepare One?
A Simple Balance Sheet is one of the three fundamental financial statements that give a snapshot of the financial position of your business entity at the end of an accounting period.
It basically showcases your company’s assets, liabilities, and shareholder’s equity as on a specific date. That is, what your company owns, the amount it owes together with the amount that is invested by its shareholders.
Furthermore, the Balance Sheet is also referred to as a Statement that showcases Sources of Funds and the Application of Funds.
This is because your business requires resources that have a longer life, that is, more than one year. Such resources can be acquired via funding provided either by you as an owner or a group of owners in the form of your investments, by banks in the form of loans, or by suppliers in the form of credit.
Thus, a Simple Balance Sheet exhibits a list of resources (assets) and how such resources are funded (liabilities). So, given the above-mentioned views, a Classified Balance Sheet is prepared by recording the sources of funds (liabilities + owner’s equity) on the left-hand side, and the application of such funds (assets) on the right side of the T-Account.
This means that every dollar invested in your business entity’s assets is either provided by the owners or the creditors. Accordingly, the sum total of assets must be equal to the sum total of liabilities and the owner’s equity.
Overview: Balance Sheet Definition
As per Balance Sheet definition, a Balance Sheet is one of the fundamental financial statements that provide a true and fair view of your business entity’s financial position as of a specific date. It showcases assets, liabilities, and owner’s equity at a specific point in time.
In other words, a company Balance Sheet is a financial statement that calculates the worth of your business (equity) by deducting the amount that your business entity owes (liabilities) from the amount that it owns (assets).
How Does a Balance Sheet Work?
There are two views that can help us in understanding the impact of economic events on the company balance sheet.
- Resources and Claims View
According to this view, assets are resources that your business entity owns on a specific date. These resources provide benefits to your business entity for a long period of time, that is, more than one year.
On the other hand, liabilities are the amounts that your business entity owes to external stakeholders like banks, creditors, etc. And Owner’s Equity is nothing but the capital that belongs to you as an owner.
- Sources and Use of Funds
As per this view, assets are nothing but the resources that are acquired by your business entity to be utilized over a long period of time. Whereas, the liabilities and owner’s equity are the funds through which such resources have been acquired.
Now, taking both the views into consideration, we come to the following simple balance sheet formula or balance sheet equation based on which the company balance sheet is prepared:
Assets = Liabilities + Owner’s Equity
Assets = Current Assets + Non-Current Assets
Liabilities = Current Liabilities + Non-Current Liabilities
Owner’s Equity = Share Capital + Retained Earnings
Thus, as per this equation, the following is the Balance Sheet accounts:
- Liabilities and
- Owner’s Equity
Do I Need a Balance Sheet?
A Company Balance Sheet is one of the important financial statements that reveal important insights to both the internal as well as external stakeholders. Thus, such a statement helps them in making informed financial decisions.
There are various reasons why you as a business entity need to prepare a balance sheet and thus know how to make a balance sheet :
- Strategic Decision Making
It gives you an understanding of where your business stands at any specific date. Thus, by knowing the financial health of your business, you can make some important strategic decisions.
For instance, in case the sum total of assets is less than the total of liabilities and shareholder’s equity, it is an indication that you need to reduce the amount you owe to the outsiders.
This could include either increasing the sources of revenue, putting in more capital, or collecting payments from debtors.
- Availing Loans and Advances
Balance Sheet Accounts allow banks to understand whether your business is financially sound enough to avail loans and advances.
Thus, by calculating the Debt-Equity ratio, they can know if extending additional loans to your business would be safe or risky.
- Identifying the Trends
The Balance Sheets of several accounting periods help you as a business entity to identify the trends in the various items listed on the Balance Sheet.
For instance, you as a business entity can know how much your business has grown over a given period of time.
- Short-Term Financial Standing
You can see the current assets against the current liabilities and get an understanding of the short-term financial health of your business entity.
Accordingly, you can know if you have sufficient funds in the short-term to pay off or meet your short-term obligations like operating expenses, supplier payments, etc.
How to Read a Balance Sheet?
There are certain things that you must keep in mind in order to read a new Balance Sheet properly. These are as follows:
- What Makes a Balance Sheet?
As stated above, a new Balance Sheet is divided into three parts:
- Liabilities and
- Owner’s Equity
The detailed elements of the Balance Sheet are given below under the heading elements of a Balance Sheet.
- Balance Sheet Equation
We know that the Balance Sheet is based on the balance sheet formula which states that Assets must be equal to Liabilities plus Owner’s Equity.
This is because the claims of both the creditors as well as the owners against your business entity must equate to the amount that you have invested in various business assets.
In other words, the worth of your business, that is equity, is nothing but the difference between everything that you own in the form of assets and the amount that you owe to the outsiders in the form of liabilities.
- Balance Sheet Format
Typically, both the asset and the liability side of the Balance Sheet are structured based on how current the assets and liabilities are?
That is, in the case of assets, the most liquid assets such as cash, inventory, etc are recorded first on the top of the new Balance Sheet. Whereas, the least liquid assets like plant and machinery, land and building, etc, are recorded at the bottom.
Likewise, in the case of liabilities, the short-term liabilities like creditors, short-term loans and advances, etc are recorded at the top of the new Balance Sheet. Whereas, the long-term liabilities including long-term loans and advances are showcased at the bottom.
The Role of the Balance Sheet in Financial Statements
As stated earlier, GAAP requires business entities to prepare a Balance Sheet at the end of an accounting period. Basically, there are three important financial statements that every business entity needs to prepare, each having its own purpose.
- A balance Sheet is a financial statement that gives a snapshot of your business entity’s financial position at a particular point in time. It reveals the resources that your business entity has or owns (assets) and the claims of both the creditors (liabilities) and owners (shareholders equity) against such resources. It is a financial statement that provides useful insights to both the external and internal stakeholders about your entity’s financial status that further helps them in making informed financial decisions.
- The income statement, on the other hand, is a financial statement that provides the users of such statement information regarding the amount of profit or loss your business entity has earned or incurred during an accounting period. Further, it helps in determining how the profit or loss was generated or incurred by your business entity. For instance, the Gross Profit figure helps you to keep a check on the cost of goods and services that you provide as a business entity. Likewise, operating profit tells your ability as a business entity to earn a profit before taking into account the impact of the financing activities.
- The Cash Flow Statement showcases cash inflows and cash outflows for an accounting period of your business entity to the user of such a statement. It provides insights to the users such as investors who can understand the cash-generating ability of your business entity and how cash is utilized.
The Balance Sheet Formula
The Balance Sheet is based on the following Accounting Equation where assets on one side of the equation equal to the Liabilities and Shareholder’s Equity on the other side. So, let’s try to understand what this Balance Sheet formula means.
Your business entity has to get funds for everything that you own (assets). You can fund these assets either by borrowing it from the creditors, taking loans from banks (in other words taking liabilities), or avail these funds from investors (shareholder’s equity).
Say, for instance, you as a business entity take a seven-year loan for plant and machinery worth $10,000. As per the double-entry system of accounting, your cash account would increase by $10,000. On the other hand, the Loan Account would also increase by $10,000, thus balancing both sides of the Balance Sheet.
Furthermore, the assets, liabilities, and the shareholder’s equity can be further divided into current assets, current liabilities, long-term assets, and long-term liabilities. These vary depending upon the industry you are into and the same terms can mean different things depending on the type of business you are into.
Elements of the Balance Sheet
If you take a Balance Sheet sample, there are three major Balance Sheet Accounts. These include:
- Owner’s Equity
Each of these is further broken down into sub-items. Let’s have a look at each of them.
Assets are the resources owned by your business entity that provide you with economic benefits in the long run. These are further categorized into current assets and noncurrent assets.
Current Assets are the assets that can be converted into cash within one year or a normal operating cycle of your business entity, whichever is longer. Operating Cycle is nothing but the time it takes you as a business entity to buy your produced inventory, sell the finished goods, and collect cash for the same.
There are a number of current assets that form part of your company’s balance sheet. These include:
- Marketable Securities
- Accounts Receivables
- Prepaid Expenses
Non-Current Assets or Fixed Assets
The Non-Current Assets are the assets that cannot be easily converted into cash in the normal course of business. They are long term assets that have been purchased for providing goods or services and are not meant for resale to earn profits.
The Non-Current Assets can be further subdivided into tangible non-current assets like plant and machinery, property, long-term investments, etc., and intangible non-current assets like goodwill, copyright, etc.
Liabilities are nothing but the money that you owe as a business entity to your creditors, lenders, and equity owners against the assets of your business entity. These can be further grouped into current liabilities and non-current liabilities.
These are the liabilities that are required to be paid off within the normal operating cycle of the business or within one year, whichever is longer. Current Liabilities include:
- Accounts Payables
- Accrued Expenses
- Current Portion of Long-Term Debt
- Deferred Revenues
These are the liabilities that are due for payment for more than one year. These include:
- Long-Term Borrowings
- Deferred Tax Liabilities
- Long-Term Provision
Owner’s Equity is nothing but the amount invested by the investors in your business entity. Thus,
Owner’s Equity = Paid-In Capital + Retained Earnings
This means that increase in your business earnings would ultimately lead to an increase in owner’s equity.
Example of a Balance Sheet
Following is the Balance Sheet sample of Star Enterprises Pvt Ltd as of December 31, 2019.
|Current Assets||Amt in US$||Current Liabilities||Amt in US$|
|Marketable Securities||4,000||Bank Loan Payable||2,000|
|Accounts Receivable||9,000||Accrued Liabilities||1,000|
|Prepaid Expenses||1,500||Current Portion of Long Term Debt||3,000|
|Total Current Assets||34,500||Total Current Liabilities||15,000|
|Non-Current Assets||Non-Current Liabilities|
|Property, Plant, Equipment at Cost||25,000||Long Term Debt Less Current Portion||10,000|
|Less: Accumulated Depreciation||13,000||Deferred Income Taxes||1,000|
|Net Property, Plant, Equipment||12,000||Total Liabilities||26,000|
|Other Assets:||Owner’s Equity|
|Patents and Trademarks||1,000||Additional Paid-In Capital||11,000|
|Goodwill||1,500||Total Paid-In Capital||12,000|
|Total Owner’s Equity||25,000|
|Total Assets||51,000||Total Liabilities and Owner’s Equity||51,000|
How To Create Balance Sheets For Your Small Business?
There are a number of ways in which you can prepare a new Balance Sheet for your business. The prompt and most error-free way of preparing a Balance Sheet is with the help of accounting software.
However, you can also choose to prepare a new Balance Sheet manually or using a balance sheet template excel or spreadsheet.
- Method I: Preparing Balance Sheet By Hand
It can be very challenging to prepare a Balance Sheet sample by hand. However, if you are running a business on a very small scale, then preparing the Balance Sheet by hand is the most appropriate way.
This can be done promptly. All you have to do is organize the various items that you are keeping track of under the three main heads of the balance sheet as mentioned above.
Assets are divided into two sub-sections: current assets and noncurrent assets. Accordingly, you first need to record all the current assets like cash, inventories, debtors, etc.
Once the current assets are recorded, you now need to report non-current or the fixed assets of your company such as property, plant and equipment, investments if any, etc.
After recording both the current and noncurrent assets, you need to total the amounts to determine the total of the asset side of your company’s Balance Sheet.
The next section of the Balance Sheet of your company consists of liabilities that you owe to the outsiders. Under this section also, you need to first report your business’s current obligations like accounts payables, short-term loans, etc.
Next, you need to record all the non-current liabilities that you are keeping track of like long-term loans from banks and other long-term liabilities.
Once both current, as well as non-current liabilities, are recorded, you need to calculate the total of current liabilities and non-current liabilities in order to determine the total amount of liabilities.
- Owner’s Equity
This is the last section of your business’s Balance Sheet where you need to report the capital invested by the investors and the portion of the retained earnings of your business entity.
Take the sum total of the capital and retained earnings to determine the total amount of shareholder’s equity.
Hence, your balance sheet should look something like the one given in the example above.
- Method II: Preparing Balance Sheet By Spreadsheet
The Balance Sheet template excel or spreadsheet is done the same way as done manually. The benefit of preparing a Balance Sheet template in excel or in a spreadsheet is that you can use SUM and DIFFERENCE formulas to make your calculations prompt and accurate.
Following are the steps to prepare a balance sheet in a spreadsheet:
- Open Google Spreadsheets and click on the Blank Sheet to start a new spreadsheet.
- Rename the spreadsheet by clicking the dropdown next to the sheet number mentioned at the bottom of the window.
- Give a Title to your spreadsheet such as ‘Balance Sheet of Star Enterprises Pvt Ltd As On December 31, 2019’.
- Put Assets as the heading in the next row and start recording your assets in the order of liquidity. That is the first record of current assets followed by fixed assets. Put their amounts in the column adjoining the column of assets. Once this is done, calculate the total of the asset side using the SUM function. And in order to calculate net fixed assets, use the MINUS function to deduct depreciation from the Gross Fixed Assets. This is the debit side of your balance sheet.
- Likewise, record liabilities in the column adjoining the amount column of the assets. Record current liabilities first followed by non-current liabilities. Put their amounts in the column adjoining the column of the liabilities. Once this is done, calculate the total of the liability side using the SUM function. This is the liability side of the balance sheet.
- Remember, that the total of the asset side must equal the total of the liability side.
You can even prepare a balance sheet in a spreadsheet in a vertical format where assets are recorded on the top whereas the liabilities are recorded at the bottom below the assets. Once the spreadsheet is complete, you can convert this into a balance sheet PDF format so that you can share it with the owners or the other stakeholders of your business.
- Method III: Preparing Balance Sheet By QuickBooks
For preparing a Balance Sheet in QuickBooks, you need to perform the following steps:
- Link your bank account with QuickBooks. Next, categorize transactions so that QuickBooks records these transactions in the software. Check videos on how to link bank accounts with QuickBooks and how to categorize transactions to know more.
- Once this is done, go to the ‘Reports’ tab on your dashboard and click on the Balance Sheet Report.
- You will see QuickBooks automatically generating a Balance Sheet Report in the sections Assets, Liabilities, and shareholder’s equity.
You can export the balance sheet report in excel format from QuickBooks online accounting software and then covert the same into balance sheet PDF format.
Balance Sheet Report By QuickBooks
A Balance Sheet in QuickBooks can be generated easily and accurately by navigating Reports > Balance Sheet to generate the report automatically. You can also customize your Balance Sheet in QuickBooks by changing the accounting period, accounting method, adding sub-columns for comparison with previous periods, customizing the header and footer of the balance sheet, etc.
In addition to this, you can also print and email the Balance Sheet Report directly from QuickBooks. You can even export the Balance Sheet of a specific accounting period in Excel format.
Restore a Deleted Balance Sheet Account in QuickBooks
Quickbooks allows you to restore a Balance Sheet account that is deleted or is inactive. Following are the different ways in which you can restore a deleted account in QuickBooks:
- Chart of Accounts
- Go to Settings and select Chart of Accounts.
- Above the Action column, select Settings, then check ‘Include Inactive’.
- Find the deleted account.
- In the Action column, select ‘Make Active’.
- Audit Log
- Go to Settings and select ‘Audit Log’.
- Find the deleted account.
- In the Event column, select the account hyperlink. This takes you to the Account screen.
- At the bottom left, uncheck ‘Inactive’.
- Select ‘Save’ and close.
FAQs on Balance Sheet Template
- What is a Balance Sheet?
A Balance Sheet is a financial statement that reveals the financial position of your business at the end of an accounting period. It consists of assets, liabilities, and owner’s equity as of a specific date.
- How to Read a Balance Sheet?
The Balance Sheet is divided into three sections: Assets, Liabilities, and Owner’s Equity. It is based on the balance sheet formula which states that the assets must balance the sum of liabilities and owner’s equity. Further, the assets and the liabilities side of the Balance Sheet are structured based on how the current assets and liabilities are, that is, most current to least current assets and liabilities.
- How To Make a Balance Sheet?
Balance Sheet can be prepared either by hand, using a Google spreadsheet, or with the help of QuickBooks online accounting software books. This statement is basically divided into three parts. The Assets section includes both current and noncurrent assets. Likewise, the Liability section includes both current and non-current liabilities. Finally, shareholder’s equity This statement is basically divided into three parts: the Assets section includes both current and noncurrent assets. Likewise, the liabilities section records both current and non-current liabilities. Finally, the shareholder’s equity
- What Does a Balance Sheet Show?
A Balance Sheet reveals the financial health of a company at a specific date. It is a statement that shows assets, liabilities, and owner’s equity of your business entity at the end of a specific accounting period. That is, what you own and what you owe to creditors and investors of your business entity.
- How To Create a Balance Sheet?
A Balance Sheet contains three parts including assets, liabilities, and shareholder’s equity. Creating a Balance Sheet includes recording assets and liabilities in the order of how current they are and then finally reporting the shareholder’s equity that includes capital contributed by investors and retained earnings.
- What Goes On a Balance Sheet?
A Balance Sheet is based on the accounting equation that states that assets must equate the total of liabilities and owner’s equity. Accordingly, elements of a Balance Sheet include Assets (both current and noncurrent assets), liabilities (both current and non-current liabilities, and owner’s equity (including capital and retained earnings).
- How to Calculate Net Income From a Balance Sheet?
Assuming there are no capital transactions in the equity account of your business, net income from Balance Sheet is calculated by simply by deducting change in liabilities from change in assets. In other words, you simply need to calculate change in equity from previous period to current period in order to calculate net income.
- What is a Classified Balance Sheet?
A Classified Balance Sheet is the one that showcases your business entity’s assets, liabilities, and owner’s equity by classifying the sub-categories of these accounts. Such classifications make it easy for the user of the Balance Sheet to deduce valuable information.
- What is on a Balance Sheet?
A Classified Balance Sheet is based on the accounting equation which states that total assets must balance the sum total of liabilities and owner’s equity. Accordingly, elements of Balance Sheet include Assets (both current and noncurrent), Liabilities (both current and noncurrent), and Owner’s Equity (including owner’s capital and retained earnings).
- The Classified Balance Sheet Will Show Which Sub-Sections?
As mentioned above, a Classified Balance Sheet reveals the sub-categories of accounts such as Assets, Liabilities, and Owner’s Equity. Accordingly, assets are sub-categorized into current assets like cash, accounts receivable, inventory, etc and non-current assets that are further subdivided into tangible (like plant and machinery) and intangible fixed assets (like goodwill). Similarly, Liabilities are sub-categorized into current liabilities (like accounts payable) and non-current liabilities (like long-term borrowings). Finally, owner’s equity is further subdivided into capital and retained earnings.
- What is Retained Earnings on the Balance Sheet?
Retained earnings are nothing but the amount remaining after distributing the dividend to the shareholders. In other words, retained earnings is the money not given to shareholders. Rather such money can be utilised for reinvestment, launching a new product, repayment of loan, or mergers and acquisitions.