Balance sheets are one of the most important financial statements needed for business analysis because it provides a snapshot of the business’s financial condition, which is essential for keeping an organisation on track with its financial goals.
Plus, business owners use it to track the company’s earnings and spending. For creditors, they view the balance sheet as a way to determine if your business qualifies for a bank loan or a corporate credit card.
Potential investors may also use it as a way to evaluate a company’s performance from the comparison of its liabilities against its assets.
As you can see, there are many uses for a balance sheet, but it all boils down to the net worth of a business.
So, how do you write a balance sheet? In this article, we break down the know-how.
You’ll first have to understand the three basic elements of the balance sheet – Assets, Liabilities, and Equity.
We also want to leave you with this concept:
Assets (A) = Liabilities (L) + Equity (E)
As you can see, this indicates that your total assets would have to equate to your total liabilities and equity in the accounting period for your balance sheet.
Or in other words, both sides of the equation would have to “balance” – hence its name. Let’s move on to talk about the three elements in further detail.
Assets are everything a business owns that has a financial value tied to it. These include items such as your cash, inventory, supplies, accounts receivable, buildings, machinery, and prepaid expenses.
Depending on the complexity of your business nature, you may need a more detailed asset category. For example, current and intangible assets, other assets or investments.
Liabilities are the company’s debts or the amount a business owes to its creditors. These include your accounts payables, salaries, interests, and taxes. Liabilities can be classified into two categories: current liabilities and long-term liabilities. The latter refers to liabilities that have a term of more than one year.
This refers to the amount of owner capital invested into the business or known as a company’s book value. This include accounts such as common stock, preferred stock, contributed surplus, or retained earnings.
Now let’s get on to the actual part of writing the balance sheet.
Take for example, Apple Inc’s consolidated balance sheet format. You can see that the value of the total assets accurately matches the total liabilities and shareholders’ equity.
No matter your company’s size or business nature, a balance sheet should be this clear-cut and straightforward. It should list the assets, followed by the liabilities, and then followed by shareholders equity. Keep this format in mind when you are doing your balance sheet in the future.
Now that you have your format all ready, you should pick a day to prepare your balance sheet. Most companies prepare their balance sheets on a quarterly basis. You can also choose to do it on a monthly basis, so on the last day of each month.
This is the most important part. Categorising and separating your items according to the order of liquidity and in terms of A, L, or E– it will make your task of preparing the balance sheet much easier.
Remember to list down your assets first, followed by your liabilities, and finally, your equity items.
This is the fun part. Now, you can add up the total value of your assets. Then, add your liabilities and equity together.
If the total assets equal to the total liabilities and equity, congratulations! You have successfully balanced your balance sheet.
Now, we may have made it sound simple, but building balance sheets– be it on a monthly or quarterly basis– can be a long and tedious process even with the use of accounting software.
Here’s where Spenmo steps in to help.
Spenmo is the end-to-end payables software that can help you streamline the creation of your balance sheets and close books faster at month-end.
With real-time expense tracking and expense management features on all-in-one dashboard, we help to supercharge the workflow for finance and accounting teams across the region.
Not to mention, we offer seamless accounting integration where you can automatically sync with your existing accounting systems, such as Xero, and Smart CSVs for Quickbooks, Netsuite, and others, cutting 90% of your processing time.
Talk to us to learn more about Spenmo today!