Balance sheets can help you see the big picture: the value of your company, how much money you have, and where it’s kept. They’re also essential for getting investors, securing a loan, or selling your business.
So you definitely need to know your way around one. That’s where this guide comes in. We’ll walk you through balance sheets, one step at a time.
What is a balance sheet?
A balance sheet gives a snapshot of your financials at a particular moment, incorporating every journal entry since your company launched. It shows what your business owns (assets), what it owes (liabilities), and what money is left over for the owners (owner’s equity).
Because it summarizes a business’s finances, the balance sheet is also sometimes called the statement of financial position. Companies usually prepare one at the end of a reporting period, such as a month, quarter, or year.
What goes on a balance sheet
All balance sheets are organized into three categories: assets, liabilities, and owner’s equity.
Let’s start with assets—the things your business owns that have a dollar value.
List your assets in order of liquidity, or how easily they can be turned into cash, sold or consumed. Anything you expect to convert into cash within a year are called current assets.
Current assets include:
- Money in a checking account
- Money in transit (money being transferred from another account)
- Accounts receivable (money owed to you by customers)
- Short-term investments
Long-term assets, on the other hand, are things you don’t plan to convert to cash within a year.
Long-term assets include:
- Buildings and land
- Machinery and equipment
- Intangible things like patents, trademarks, and goodwill
- Long-term investments
Let’s say you own a vegan catering business called “Where’s the Beef”. As of December 31, your company assets are: money in a checking account, an unpaid invoice for a wedding you just catered, and cookware, dishes and utensils worth $900. Here’s how you’d list your assets on your balance sheet:
Next come your liabilities—what your business owes to others.
List your liabilities by their due date. Just like assets, you’ll classify them as current (due within a year) and long-term (the due date is more than a year away).
Your current liabilities might include:
- Accounts payable (what you owe suppliers for items you bought on credit)
- Wages you owe to employees for hours they’ve already worked
- Loans that you have to pay back within a year
- Taxes owed
And here are some long-term liabilities:
- Loans that you don’t have to pay back within a year
- Bonds your company has issued
Returning to our catering example, let’s say you haven’t yet paid the latest invoice from your tofu supplier. You also have a business loan, which isn’t due for another 18 months.
Here are Where’s the Beef’s liabilities:
Equity is money currently held by your company. (This category is usually called “owner’s equity” for sole proprietorships and “stockholders’ equity” for corporations.)
Owners’ equity includes:
Capital (money invested into the business by the owners)
Private or public stock
Retained earnings (all your revenue minus all your expenses since launch)
Equity can also drop when an owner draws money out of the company to pay themself, or when a corporation issues dividends to shareholders.
For Where’s the Beef, let’s say you invested $2,500 to launch the business in 2016, and another $2,500 a year later. Since then, you’ve taken $9,000 out of the business to pay yourself and you’ve left some profit in the bank.
Here’s a summary of Where’s the Beef’s equity:
The balance sheet equation
This simple equation is the key to the balance sheet:
Assets = Liabilities + Owner’s Equity
Assets go on one side, liabilities plus equity go on the other. The two sides must balance—hence the name “balance sheet.”
It makes sense: you pay for your company’s assets by either borrowing money (i.e. increasing your liabilities) or getting money from the owners (equity).
Balance sheet example
We’re ready to put everything into the standard template. Here’s what a simple balance sheet looks like, in a proper balance sheet format:
Finally, let’s check that everything balances according to the balance sheet equation:
Assets = Liabilities + Shareholders’ Equity
$9,050 = $2,150 + $6,900
$9,050 = $9,050
Nice. Your balance sheet is ready for action.
The purpose of a balance sheet
Because the balance sheet reflects every transaction since your company started, it reveals your business’s overall financial health. At a glance, you’ll know exactly how much money you’ve put in, or how much debt you’ve accumulated. Or you might compare current assets to current liabilities to make sure you’re able to meet upcoming payments.
You can also compare your latest balance sheet to previous ones to examine how your finances have changed over time. You’ll be able to see just how far you’ve come since day one.
Still uneasy about tackling your balance sheet? Try a bookkeeping service like Bench. We’ll pair you with a bookkeeper who will prepare your financial statements for you—so you’ll always know where you stand.