Pie chart and calculator floating on yellow background

Balance Sheets, Explained (With Examples)

By Frances McInnis on January 11, 2019

Balance sheets aren’t glamorous. But they’re useful—and not just for accountants.

As a business owner, 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.

Balance sheet basics

The balance sheet is one of the three main financial statements, along with the income statement and cash flow statement.

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.

Accounting 101: Set Your Finances up the Right Way

Learn the fundamentals of small business accounting, and set your finances up for success with this free guide.

What goes on your balance sheet

All balance sheets are organized into three categories: assets, liabilities, and owner’s equity.

Assets

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

  • Inventory

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:

ASSETS
Bank account $2,050
Accounts receivable $6,100
Equipment $900
Total assets $9,050

Liabilities

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:

LIABILITIES
Accounts payable $150
Long-term debt $2,000
Total liabilities $2,150

Equity

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:

OWNER’S EQUITY
Capital $5,000
Retained earnings $10,900
Drawing -$9,000
Total equity $6,900

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 Where’s the Beef’s finished balance sheet:

Balance Sheet example

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.

Great. Now what do I do with it?

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.

Accounting 101: Set Your Finances up the Right Way

Learn the fundamentals of small business accounting, and set your finances up for success with this free guide.


This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

Friends don’t let friends do their own bookkeeping. Share this article.

Want a free month of bookkeeping?

Sign up for a trial of Bench. We’ll do one month of your bookkeeping and prepare a set of financial statements for you to keep. No pressure, no credit card required.

Decorative patterns