Definition of ‘Balance Sheet’
“A balance sheet is basically a summary of the financial balances of an individual or an organization. It reports a company’s assets, liabilities and shareholders’ equity. “
It is a financial statement that provides an overview of what a company owns and owes, as well as the amount invested by the shareholders.
Formula used for a balance sheet
Source: https://www.nonprofitaccountingbasics.org/reporting-operations/statement-financial-position
How to maintain your balance sheet
1. Use the basic accounting equation to make the balance sheets:
The equation is, Assets = Liabilities + Shareholders’ equity. Assets are the resources owned by the company. Liabilities are the expenses of the company. Shareholders’ equity is the contribution of the shareholders to the company. This information is compulsory to make a balance sheet.
In a balance sheet, the total sum of assets should be equal to the total sum of liabilities.
2. Choose a date for the balance sheet:
A balance sheet is made to assess the financial position of a company. Companies usually prepare an official balance sheet every quarter (the last day of March, June, September and December) and at the end of the financial year (December 31 or March 31)
3. Give a heading for the balance sheet:
Use the title balance sheet on the top of a page. Below it, list the name of the company, and the date on which the balance sheet was made.
4. Prepare the assets section:
A. List all the current assets – Current assets are basically cash and other assets that are expected to be converted to cash easily.
Include a sub total of the current assets and label it “Total Current Assets”
Please refer to figure 1 to understand the items that come under current assets.
B. List all the non-current assets – Non-current assets are determined by a company’s value of plant, property and equipment that can be used for more than a year (minus depreciation)
Include a sub total of the non-current assets and label it “Total Non-Current Assets”
Please refer to figure 1 to understand the items that come under non-current assets.
C. List all the intangible assets – Intangible assets are also considered to be non-current assets. They are assets that are not physical in nature and will last for more than 1 year. These include goodwill, patents, copyrights, trademarks and franchises.
5. Add up all the current and non-current assets and label the total amount as “TOTAL ASSETS”.
6. Prepare a liabilities section:
A. List all the current liabilities- Current liabilities are liabilities that are due to be paid to creditors within one year of the balance sheet date.
Include a sub total of the current liabilities and label it “Total Current Liabilities”
Please refer to figure 1 to understand the items that come under current liabilities.
B. List all the long-term liabilities- Long term liabilities include any liabilities that will not be settled within one year.
Include a sub total of the long-term liabilities and label it “Long Term Liabilities”
Please refer to figure 1 to understand the items that come under long term liabilities.
7. Add up all the current and long-term liabilities and label the total amount as “TOTAL LIABILITIES”.
8. Calculate Shareholders’ equity:
This includes the capital that is contributed by the shareholders to the company.
9. Add the “Total Liabilities” and “Total Shareholders’ Equity” figures:
The balance sheet is correct if the “Total Assets” and “Total Liabilities and Total Shareholders’ Equity” are equal.
If the balance sheet does not tally, then just check if you have missed or repeated any value.
10. If “Total Assets” is greater than “Total Liabilities”, then the company is making a profit. Otherwise, it’s under loss.