How to Prepare a Balance Sheet

One of the important elements of financial statement analysis is the balance sheet. This shows your assets—which is what you own, your liabilities—which is what you owe, and your owner’s equity—which is yours and your partners' investment in the business.

First, you'll need to determine the financial statements that you or your financial professional will generate for your business. These financial statements will help you determine your firm's financial position at a point in time and over a period of time, as well as your cash position.

Many small businesses fail because an owner loses a grip on the firm's financial position. If you understand financial statements, that won't happen to you.

Follow this guide for preparing a balance sheet.:

Assets

  • Line 1 is the firm’s cash account. Small business firms must keep some cash on hand for day-to-day transactions. Business firms also need to keep cash on hand for emergencies and to take advantage of any bargains they might find in the marketplace.
  • Line 2, accounts receivable, represents what your credit customers owe you if your firm extends credit. Since the balance sheet is like a snapshot of a firm’s financial position at one point in time, the figure for accounts receivable and all the other accounts are accurate for the day on which this financial statement is developed.
  • The value of the firm’s inventory is stated on Line 3. Inventory is simply the products the firm has for sale.
  • The last asset on the sample balance sheet is fixed assets. This asset is stated on Line 4 and includes any equipment and vehicles you own and any land and buildings you own. These assets normally refer to the large and highly valued assets that are owned by your business firm and those that can be depreciated over time.

Liabilities and Equity

  • Line 6 lists accounts payable, which are the short-term credit accounts you owe your suppliers.
  • Line 7 shows any long-term bank loans or loans from other sources that you’ve taken out with a maturity of more than a year. You may have had to use long-term loans to keep your firm solvent.
  • Line 8 shows the amount of owners' capital that has been invested in the firm. This is the money that the owner and any other investors have put in the firm.
  • The last line, line 9, totals the number of liabilities and equity. This is the total amount the firm owes plus the owners’ investment in the firm. The total of the liabilities and equity must equal total assets as the firm can’t own more than it owes.

Balance Sheet Example

This is what a basic, year-end balance sheet might look like for a company:

AssetsValue
1.Cash$ 40,000
2.Accts Rec200,000
3.Inventory180,000
4.Fixed Assets400,000
5.Total Assets820,000
Liabilities and EquityValue
6.Accts Payable$ 180,000
7.LT Bank Loans240,000
8.Owner's Capital400,000
9.Total Liab & Equity820,000