How to Make a Balance Sheet (and Why)

The Basics of a Balance Sheet

Here’s the snapshot that a balance sheet for a small business delivers in a simple equation: Assets = Liabilities Shareholder Equity.

Assets

Assets are anything you own that has measurable cash value, that is, liquidity, ranked by how quickly you can convert them to dollars. You have current assets and long-term assets.

Current Assets

Current assets can be liquidated in a year or less, including cash and cash equivalents such as checks and your bank accounts; accounts receivable that your clients will pay soon; securities and investments you can sell fast; prepaid expenses (such as rent and insurance); and your inventory of finished products, raw materials, and equipment.

Long-Term Assets

Long-term assets include assets you wouldn’t expect to sell in a year:

• Your Fixed Assets — Land, buildings, and such machinery and equipment that can be used for more than a year minus depreciation
• Intangibles — These include intellectual properties, patents, copyrights, licenses, franchise agreements, etc.
• Long-Term Securities — Examples include real estate and bonds

Liabilities

Your liabilities are anything you owe to your debtors. As with assets, they can be classified by time:

Current Liabilities

Current liabilities are those such as accounts payable and other accumulated expenses that usually need to be paid within a year.

Non-Current Liabilities

Non-current liabilities include long-term obligations (loans, leases, bonds payable, etc.) that take longer than a year to make good.

Shareholders’ Equity

Shareholders’ equity generally means the net worth of a company, or your bottom line. It’s the money you’d have left if your assets were sold and your liabilities paid. What’s left belongs to the shareholders, private, or public owners.

Assets = Liabilities Shareholder’s Equity — that’s your company’s health and well-being in a concise diagnosis. If your figures are correct going in, they’ll produce an accuracy in the final result that can help you avoid mistakes, make constructive changes, and find new ways to improve cash flow and operations.

Accuracy here is the key. It’s worth the time it takes you to get your numbers right. Eliminate your errors, omissions, and duplications at the foundation, and you can build a sound balance sheet on it.

The Steps to a Sound Balance Sheet

1. What’s Your Start Date?

Being a snapshot, it captures the state of your business right now, so a balance sheet is always linked to a calendar date. Even a small business needs to make them regularly (quarterly or even monthly).

Fix a start date, and decide on how often you’ll be making your balance sheet. A general practice is quarterly reports, March 31, June 30, September 30, and December 31. If you’re a growing enterprise, or if you need to keep a closer eye on your bottom line, then the last day of every month might be best.

2. Accurately List All Your Assets as Line Items

A complete and precise initial listing of your assets will save you time in making future versions of your balance sheet. List your assets in order of how easily you can make them liquid, cash and receivables, first, etc. Follow with your long-term and non-monetary assets.

3. Accurately Add Up All Your Assets

Tally your assets to get your total. This is a good chance to double-check that final figure against your general ledger, and to spot and fix mistakes.

4. Calculate Current Liabilities

Short-term notes payable, accounts payable, and accrued liabilities--current liabilities are the ones due within a year of the start date on your balance sheet.

5. Calculate Long-Term Liabilities

Pension plans, mortgages, long-term notes, bonds payable that won’t be settled within the year—these are your long-term liabilities.

6. Add Up Current & Long-Term Liabilities

Get your total liabilities by adding the two.

7. Calculate Your Owner’s Equity

Total up your company’s working capital; retained earnings (that is, profits reserved for reinvestments and not distributed as shareholder dividends; and the shareholders’ equity (the combination of share capital plus retained earnings.

8. Total Up Your Liabilities & Owners’ Equity

You should have the correct equation at the close: Assets = Liabilities Shareholder’s Equity. Here’s where any errors of omission or redundancy in the process will reveal themselves. Don’t miss the chance to make corrections!

What Will a Sound Balance Sheet Reveal?

Bad news: a balance sheet may bring net worth problems to light.

Good news: now that you see them, act to bring in more income, and cut/concentrate debt.

Bad news: you aren’t saving enough to meet your goals.

Good news: now you can see in black and white the outcomes of your decisions and policies, in, say, net income for the month or quarter (calculated by subtracting your expenses from your gross income). If it’s not what you expect, you can take realistic steps to improve. If the expenses were unusual (the effects of COVID or a weather disaster, for example), you can plan your recovery.

Clarity in your bookkeeping is the beginning of better decisions and long-term success. That assessment monthly or quarterly helps keep your vision sharp and your path clear.

A finished balance sheet example looks like this:

Don’t Wait to Gain Some Financial Literacy

Technologies for business accounting evolve rapidly, of course, and they only get better by giving even small companies new access to measurements and data that used to go neglected. But these practices go back centuries--this kind of bookkeeping and self-assessment has been basic to business since at least, and maybe well before, the 1400s. So, there’s no need for a business to wait for sophisticated software or consultants before putting pencil to paper. If you engage professional help down the road, you’ll have the financial literacy you need to ask the right questions.