A balance sheet is an itemized breakdown of your current assets and liabilities to help the lender get a snapshot of your business’s net worth. Here's a step-by-step guide to help you create a balance sheet:
Gather financial information
Collect all your financial documents, including business bank statements, loan information, and any other records of financial transactions.
Pick the balance sheet date
A balance sheet gives a snapshot of your business's finances—including assets, liabilities, and owner's equity—on any given day. It's usually prepared quarterly (end of March, June, September, and December) or monthly (last day of each month).
List your assets
Assets are things your business owns. Categorize them into two groups:
Current assets: These are the assets that you can convert to cash within a year. Generally, they fall into a few main categories:
Cash on hand: The money in your business bank account(s)
Accounts receivable: Money your clients owe you, which you expect to receive soon.
Inventory: The products or materials you have ready for sale.
Long-term assets: Consider these as the resources your business intends to keep for over a year. They usually fall into several key categories:
Fixed assets: These are tangible items like property, buildings, and equipment used in your operations.
Intangible assets: Non-physical assets such as patents, trademarks, copyrights, and other forms of intellectual property.
Investments: Long-term investments in other companies, stocks, bonds, or real estate that aren't intended for quick sale
Identify your liabilities
Liabilities are what your business owes to others. Like assets, categorize them into two groups:
Current liabilities: Debts and obligations due within a year, such as accounts payable, short-term loans, and business credit cards.
Non-current liabilities: Debts or financial obligations that your business is not required to pay off within the next year, such as long-term loans, shareholder loans, deferred taxes, etc.
Calculate owner's equity
This is the residual interest in the assets of your business after deducting liabilities. It includes your initial investment and any retained earnings.
Think of equity as the business's net worth. It's what's left over when you subtract all the debts (liabilities) from everything the business owns (assets). Equity = total assets - total liabilities
Organize your balance sheet
Set up the balance sheet format in a clear and organized manner. You can use a spreadsheet or accounting software for this. Or you can use our easy-to-use template.
Total your assets and liabilities
Add up the values for assets and liabilities separately. Ensure both sides of the balance sheet are balanced. (Assets = liabilities + owner's equity)
The balance sheet must balance
A balance sheet must be balanced because it shows that what your business owns is exactly equal to what it owes plus your investment in the business. It's like a financial snapshot:
Assets represent everything the company owns
Liabilities represent everything the company owes
Owner's equity is the residual interest in the assets after deducting liabilities. It represents the owner’s stake in the company.
When you add up liabilities and owner’s equity, it should always equal the total assets. If it doesn’t balance, it means there's a mistake in the numbers.
Review and update
Regularly update your balance sheet to reflect any changes in your business's financial position. This helps in making informed financial decisions.
If you have questions or need assistance preparing a balance sheet, consider consulting with a financial advisor.
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