A Step by Step Guide to Prepare a Balance Sheet for Companies
Companies normally prepare a balance sheet every month or on a quarterly basis; the time depending on the frequency of reporting. Well, whichever one it is, you should be careful about creating the sheet in the right way. This is because a balance sheet is one of the most important financial documents your business will need.
What is a Balance Sheet?
A balance sheet is a financial document that reports a company’s assets, liabilities, and the shareholder’s equity. It gives a clear clue about how much profit the company has been making and thus, gives us an idea about its current financial position. Furthermore, a balance sheet can also be used to study the business’s financial status in the past, and its expected spot in the future.
The Equation of a Balance Sheet
This is the equation to prepare a balance sheet.
Assets = Liabilities + Shareholder’s Equity
Remember, the asset should always be equal to the sum of liability and the shareholder’s equity.
For a better understanding, here is what the metrics mean:
Assets: Assets means the things that the business owns. They are the goods and resources of the firm that offer monetary value.
Liabilities: Liabilities are the things that the company, as an individual entity, owes to other parties. This could include payroll, debts, rents, etc. In other words, liabilities are the money the company needs to pay.
Shareholder’s Equity: In simple words, shareholder’s equity is the money that would be left if all the assets of the company were sold for their value, and the liabilities were paid. It could be negative or positive, and the equity is to be distributed to the shareholders, depending on how many shares they have.
The Balance Sheet Must Always Balance
Remember, the assets should always be equal to the sum of liabilities and the shareholder’s equity. If that’s not the case, we can infer that there have been miscalculations in accounting. There can be various culprits like currency exchange errors, misplacements in the data, etc.
How to Prepare a Balance Sheet?
Here is the process of preparing a balance sheet:
Step 1: Choose the Reporting Date
The balance sheet calculates the asset, liability, and equity during a single day. The reporting day is the final day of the reporting period.
In most cases, companies have a reporting period of four months. This means that they create balance sheets at the end of March, June, September, and December. However, the dates can vary, depending on when the company was established. On the other hand, some firms create balance sheets every month or once a year.
Note: If preparing a balance sheet or any other accounting processes are confusing to you, then you can avail Financial Reporting Services.
Step 2: Identify Your Assets:
There are two types of assets:
Current Assets: Current Assets are the assets that the company expects to get financial returns from within a year. This includes pending payments, products in the inventory ready to ship, etc.
Noncurrent Assets: Noncurrent assets are the assets that do help make the company money but they will only be sold after some years. For example, real estate, trademark, etc.
You can make separate lines for each asset, which will help investors, beneficiaries, and other interested parties get a better insight into what each of them is. For example:
- Accounts Receivable
- Marketable Securities
- Inventory Products
You are going to have a long list of assets. Therefore, make sure you include all the things that are likely to make you money this year.
Step 3: Recognize Your Liabilities
Similar to assets, there are two types of liabilities:
Current Liabilities: Current liabilities are the money that the company needs to pay within the year. For example, monthly rent and payroll.
Noncurrent Liabilities: Noncurrent liabilities are the finances that the firm will pay, but will do so in the long term. For example, real estate or other loans.
Make a list of the liabilities like you did with assets.
Step 4: Calculate Shareholders’ Equity
The calculation of the shareholder’s equity will be more complex depending on the number of shareholders. You have to keep every type of shares in check, which include common stocks, preferred stock, retained earnings, etc.
Step 5: Tally the Metrics
The final step to prepare a balance sheet is to simply verify that the sum of the equity and liability is equal to the assets. If not, you will have to look at the errors in the calculations.