How to Do a Balance Sheet for a Small Business

A balance sheet offers a clear financial snapshot of a small business at a particular moment in time. This statement provides insights into what a business owns, what it owes, and the owner’s stake in the company. It serves as a foundational financial report, allowing business owners to assess solvency, liquidity, and overall financial position, which is essential for informed decision-making.

Understanding the Balance Sheet’s Core Elements

A balance sheet organizes a business’s financial position around three main categories: assets, liabilities, and owner’s equity. These components are linked by the accounting equation: Assets equal Liabilities plus Owner’s Equity. This equation illustrates that a business’s resources are funded either by what it owes to others or by the owner’s investment.

Assets are everything a business owns that has economic value. Current assets are items expected to be converted into cash or used within one year, such as cash on hand, accounts receivable, and inventory. Non-current assets, also called fixed assets, are long-term holdings not expected to be converted into cash within a year, including property, plant, and equipment.

Liabilities are the financial obligations a business owes to outside parties. Current liabilities are debts due within one year, such as accounts payable, short-term loans, and accrued expenses. Long-term liabilities are obligations due beyond one year, including mortgages payable and long-term bank loans.

Owner’s equity, also known as capital, represents the owner’s residual claim on the business’s assets after all liabilities have been paid. For a small business, this includes the owner’s initial capital contributions, additional investments, and retained earnings, which are the accumulated profits of the business less any owner’s draws or distributions. Owner’s draws reduce the owner’s equity by the amount of funds or assets taken from the business for personal use.

Gathering Your Financial Information

Before constructing a balance sheet, a small business must gather and categorize financial records. This ensures all components of assets, liabilities, and equity are accurately represented by extracting figures from various source documents.

To determine current asset values, bank statements provide exact cash balances. Accounts receivable ledgers or individual customer invoices show the money customers owe. Inventory counts and valuation records provide the value of goods available for sale.

For non-current assets, a fixed asset register details property, plant, and equipment, including their acquisition cost and accumulated depreciation. Depreciation schedules help determine the net book value of these assets. Prepaid expenses, such as insurance premiums paid in advance, are also recorded from payment receipts.

Identifying liabilities requires reviewing accounts payable ledgers, which detail amounts owed to vendors for goods or services received. Loan statements are essential for determining outstanding principal balances, distinguishing the current portion due within 12 months from the long-term portion of the debt. Credit card statements provide balances owed on business credit lines, while records of unearned revenue track prepayments received from customers for services or goods not yet delivered.

Owner’s equity figures are derived from records of direct owner contributions, such as cash or property invested into the business. Owner’s draw records document any funds or assets taken out by the owner for personal use, which reduce equity. Prior period profit and loss statements provide the net income or loss, which contributes to the retained earnings component of owner’s equity.

Constructing Your Balance Sheet

With all financial information gathered, assemble the balance sheet according to a standard format. This ensures clarity and adherence to accepted accounting principles, presenting assets first, followed by liabilities, and then owner’s equity.

Begin by listing all current assets, ordering them by their liquidity, meaning how quickly they can be converted into cash. This sequence usually starts with cash, followed by short-term investments, accounts receivable, inventory, and then prepaid expenses. After listing these individual current asset amounts, calculate their sum to arrive at total current assets.

Subsequently, list non-current assets, such as property, plant, and equipment. For these assets, the original cost is listed, and then accumulated depreciation is subtracted to arrive at their net book value. Intangible assets, like patents or trademarks, are also included in this section. Summing these figures provides the total non-current assets, which are then added to total current assets to determine the grand total assets.

Proceed to the liabilities section, starting with current liabilities. These include accounts payable, the current portion of long-term debt, unearned revenue, and accrued expenses like salaries payable or interest payable. Calculate the sum of these items to obtain total current liabilities. Following this, list long-term liabilities such as long-term loans or mortgages payable. Summing these long-term obligations provides total long-term liabilities, which are then added to total current liabilities to arrive at the total liabilities.

Finally, calculate and present the owner’s equity section. This typically involves the owner’s capital contributions, which represent the initial and any subsequent investments made by the owner. Retained earnings are also included, calculated as the beginning retained earnings plus the net income for the period, minus any owner’s draws taken. Summing these components yields the total owner’s equity.

The final step is to apply the accounting equation to verify the balance sheet’s accuracy. Total assets must precisely equal the sum of total liabilities and total owner’s equity. If Total Assets do not equal Total Liabilities plus Total Owner’s Equity, it indicates an error in recording transactions, classification, or calculation. This discrepancy necessitates a thorough review of all entries and sums to identify and correct the imbalance, ensuring the financial statement accurately reflects the business’s position.

Utilizing Accounting Tools

Manually preparing a balance sheet can be a detailed process, but various accounting tools can significantly streamline its creation. These tools range from basic spreadsheet templates to comprehensive accounting software, each offering different levels of automation and functionality. Leveraging these resources can save time and reduce the likelihood of mathematical errors.

Spreadsheet software, such as Microsoft Excel or Google Sheets, provides a flexible platform for constructing a balance sheet. Pre-made templates are widely available online, offering a structured layout with built-in formulas for calculations. While these templates require manual data entry, they simplify the organization and summation of financial figures. A subscription to a standard office suite, which includes spreadsheet software, typically costs between $6 and $20 per user per month.

Dedicated accounting software packages, including popular options like QuickBooks, Xero, or FreshBooks, offer a more automated approach to financial reporting. Once a business sets up its chart of accounts and consistently records daily transactions, the software can generate a balance sheet automatically with minimal effort. These platforms often integrate various financial functions, from invoicing to payroll, providing a holistic view of the business’s financial health. Subscription costs for small business accounting software plans typically range from approximately $15 to $70 per month, depending on the features included and the number of users.