Step by step: How to take stock
Businesses use balance sheets to make important financial decisions. One way to better understand your business finances is to organize them in a way that allows you to quickly analyze all of your business’s assets, liabilities, and equity.
Why are balance sheets important?
Balance sheets help accountants, investors, creditors and business owners determine the overall financial health of a business. These reports provide a quick snapshot of a company’s finances, typically at the end of the quarter or year. Balance sheets are often used as a guide before making financial decisions for the future.
How to take stock
While it might seem daunting at first, creating a balance sheet is actually a straightforward task once you understand what you need to do. You can create it using software like Excel or by investing in accounting software. Whether you are a business owner or an accountant, you can follow these steps to establish a basic balance sheet:
1. Invest in accounting software
If you want a program with built-in features to help you enter data and perform calculations more efficiently, consider investing in accounting software. There is a wide range of software that is aimed at beginner to advanced users, so you can choose one that suits your current skill level. If you don’t already have a basic understanding of accounting, you may want to invest in advanced software that does most of the work for you.
2. Create a title
The first step is to create a header for your document. The typical naming convention includes the words “balance sheet” with your business name and the year or quarter end date below.
Clearly tagging this information makes it easier for you and all stakeholders to find the balance sheet when you need it and compare it to other financial documents or to balance sheets from other years or quarters.
3. Use the basic accounting equation to separate each section
Assets = Liabilities + Equity. This is the basic equation that determines whether your balance sheet is truly “balanced” after recording all of your assets, liabilities, and equity. If the sum of the numbers on both sides of the equal sign are the same, your sheet is balanced.
There are generally five parts to a basic balance sheet: individual assets, total assets, liabilities, equity, total liabilities and owner’s responsibility. As long as you have these five items on your balance sheet, you can order them in any way that works best for you. But remember, it’s important to structure your balance sheet so that you don’t miss out on any relevant information.
Here’s a common example of how to structure your balance sheet:
- Assets section in the upper left corner
- Passive section top right
- Equity section under liabilities
- Total asset category at the bottom of the balance sheet
- Total liabilities and equity category combined under total assets
4. Include all your assets
You can first list your current assets (cash, investment securities, or inventory), ordering those that your business can quickly turn into cash before others.
Then, in a separate sub-heading, you can list your non-current assets (real estate, equipment and securities and non-market investments) and your intellectual property. Include your intellectual assets like trademarks, patents or copyrights in your non-current category, or you can label them under “intangible assets”.
Once you have listed all of your assets and their value, you can calculate your total assets by adding your current, non-current, and intellectual assets. Properties. For non-current assets in particular, you should be prepared to explain how you determined their fair value.
Finally, you can compare your total to the one in your business ledger to make sure there is no discrepancy. If there are, check your numbers.
Total assets = Current assets + Non-current assets + Intellectual property.
5. Create a section for liabilities
Your liabilities section lists all of your current and non-current liabilities. Once you’ve listed and assigned the values for each, you can add them up to get your total. Liabilities. Examples of liabilities include short and long term debt and accounts payable.
Total liabilities = Current liabilities + Non-current liabilities
6. Create a section for owner’s credit.
Your owner’s equity section includes your retained earnings – the assets you have left after liabilities and the payment of distributions to your shareholders or owners. Add the sum of each to get the total amount of owner’s equity, or use the following equation:
Owner’s equity = total assets – total liabilities
7. Add total liabilities to total owner’s equity
Once you have your total equity, you can add it to your total liabilities. Your total liabilities (including debt or accounts payable) and total equity (remaining value) should equal your total assets.
If they are not equal, that means you need to check your calculations.
Here is a sample template to help you format your balance sheet:
December 31, 2020
Total liabilities and equity
Total assets = total liabilities + owner’s equity
By putting these steps into practice, it will help you avoid accounting errors, identify new cash flow opportunities and drive financial success within your business. Manage your Business current accounts can make creating a balance sheet much easier. Talk to an investment banker to see what other options are available to you.