A company’s balance sheet is one of the most important financial statements it produces—typically on a quarterly or even monthly basis (depending on the frequency of reporting).
Depicting your total assets, liabilities, and net worth, this document offers a quick look into your financial health and can help inform lenders, investors, or stakeholders about your business. Based on its results, it can also provide you key insights to make important financial decisions.
When paired with cash flow statements and income statements, balance sheets can help provide a complete picture of your organization’s finances for a specific period. By determining the financial status of your organization, essential partners have an informative blueprint of your company’s potential and profitability.
Have you found yourself in the position of needing to prepare a balance sheet? Here's what you need to know to understand how balance sheets work and what makes them a business fundamental, as well as steps you can take to create a basic balance sheet for your organization.
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A balance sheet is a financial statement that communicates the “book value” of an organization, as calculated by subtracting all of the company’s liabilities and shareholder equity from its total assets.
A balance sheet offers internal and external analysts a snapshot of how a company is performing in the current period, how it performed during the previous period, and how it expects to perform in the immediate future. This makes balance sheets an essential tool for individual and institutional investors, as well as key stakeholders within an organization and any outside regulators who need to see the status of an organization during specific periods of time.
Most balance sheet formats are arranged according to this equation: Assets = Liabilities + Shareholders’ Equity
The equation above includes three broad buckets, or categories, of value which must be accounted for:
An asset is anything a company owns which holds some amount of quantifiable value, meaning that it could be liquidated and turned to cash. They're the goods and resources owned by the company.
Assets can be further broken down into current assets and non-current assets:
A liability is anything a company or organization owes to a debtor. This may refer to payroll expenses, rent and utility payments, debt payments, money owed to suppliers, taxes, or bonds payable.
As with assets, liabilities can be classified as either current liabilities or non-current liabilities:
Shareholders’ equity refers generally to the net worth of a company, and reflects the amount of money that would be left over if all assets were sold and liabilities paid. Shareholders’ equity belongs to the shareholders, whether they're private or public owners.
Just as assets must equal liabilities plus shareholders’ equity, shareholders’ equity can be depicted by this equation: Shareholders’ Equity = Assets - Liabilities
A balance sheet should always balance. The name itself comes from the fact that a company’s assets will equal its liabilities plus any shareholders’ equity that has been issued. If you find that your balance sheet is not truly balancing, it may be caused by one of these culprits:
Here are five steps you can follow to create a basic balance sheet for your organization. Even if some or all of the process is automated through the use of an accounting system or software, understanding how a balance sheet is prepared will enable you to spot potential errors so that they can be resolved before they cause lasting damage.
A balance sheet is meant to depict the total assets, liabilities, and shareholders’ equity of a company on a specific date, typically referred to as the reporting date. Often, the reporting date will be the final day of the accounting period.
Companies, especially publicly traded ones, prepare their balance sheet reports on a quarterly basis. When this is the case, the reporting date usually falls on the final day of the quarter. For companies that operate on a calendar year, those dates are:
Companies that report on an annual basis will often use December 31st as their reporting date, though they can choose any date.
It's not uncommon for a balance sheet to take a few weeks to prepare after the reporting period has ended.
After you’ve identified your reporting date and period, you’ll need to tally your assets as of that date.
Typically, a balance sheet will list assets in two ways: As individual line items and then as total assets. Splitting assets into different line items will make it easier for analysts to understand exactly what your assets are and where they came from; tallying them together will be required for final analysis.
Assets will often be split into the following line items:
Current and non-current assets should both be subtotaled, and then totaled together.
Similarly, you will need to identify your liabilities. Again, these should be organized into both line items and totals, as below:
As with assets, these should be both subtotaled and then totaled together.
If a company or organization is privately held by a single owner, then shareholders’ equity will be relatively straightforward. If it’s publicly held, this calculation may become more complicated depending on the various types of stock issued.
Common line items found in this section of the balance sheet include:
To ensure the balance sheet is balanced, it will be necessary to compare total assets against total liabilities plus equity. To do this, you’ll need to add liabilities and shareholders’ equity together.
It's important to note that this balance sheet example is formatted according to International Financial Reporting Standards (IFRS), which companies outside the United States follow. If this balance sheet were from a US company, it would adhere to Generally Accepted Accounting Principles (GAAP).
If you’ve found that your balance sheet doesn't balance, there's likely a problem with some of the accounting data you've relied on. Double check that all of your entries are correct and accurate. You may have omitted or duplicated assets, liabilities, or equity, or miscalculated your totals.
Balance sheets are one of the most critical financial statements, offering a quick snapshot of the financial health of a company. Learning how to generate them and troubleshoot issues when they don’t balance is an invaluable financial accounting skill that can help you become an indispensable member of your organization.
Do you want to learn more about what's behind the numbers on financial statements? Explore our finance and accounting courses to find out how you can develop an intuitive knowledge of financial principles and statements to unlock critical insights into performance and potential.
This post was updated on May 9, 2024. It was originally published on September 10, 2019.
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