How to Prepare a Balance Sheet Step by Step for Your Business
Learn how to create an accurate balance sheet by organizing assets, liabilities, and equity to better understand your business’s financial position.
Learn how to create an accurate balance sheet by organizing assets, liabilities, and equity to better understand your business’s financial position.
A balance sheet is a fundamental financial statement for any business, offering a snapshot of what a company owns and owes at a specific point in time. Whether seeking financing, evaluating company health, or preparing for tax season, an accurate balance sheet informs decision-making.
Creating a balance sheet can seem daunting initially, but breaking it down into steps simplifies the process. This guide walks through preparing a balance sheet step-by-step, enabling you to build one that reflects your business’s financial position.
The first consideration is how to structure the information. Standard accounting practices offer two main styles: the report format and the account format. Both arrange assets, liabilities, and equity but differ in layout, often chosen based on audience, business complexity, or software capabilities.
The report format presents the balance sheet vertically, listing assets first, followed by liabilities, and then equity in a single column. This format is common for internal review or simpler businesses, as some find it easier to read with totals listed sequentially.
The account format uses a horizontal layout, resembling a ‘T’. Assets are detailed on the left, while liabilities and equity are on the right. Totals at the bottom visually demonstrate the accounting equation: Assets = Liabilities + Equity. This format clearly separates what the company owns from how those assets are financed.
Accounting standards like U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) offer flexibility in choosing between the report and account formats. Both frameworks focus on ensuring the presented information is clear, understandable, and includes required classifications, such as distinguishing between current and non-current items, rather than mandating a specific layout. Guidance like IAS 1 outlines presentation requirements.1IFRS Foundation. IAS 1 Presentation of Financial Statements Upcoming standards, such as IFRS 18, may introduce more specific structural requirements for financial statements but are expected to maintain flexibility for the balance sheet’s overall format. The chosen format should effectively communicate the company’s financial position.
After selecting a format, the next step involves identifying and organizing the company’s assets – resources owned that hold value and provide future economic benefits. Classifying assets correctly is fundamental. The primary division is between current assets and non-current (or long-term) assets, based on when the asset is expected to be converted into cash, sold, or consumed.
This classification generally hinges on a one-year timeframe or the business’s normal operating cycle, whichever is longer. The operating cycle is the average time to acquire materials, convert them into products, sell them, and collect cash. For many businesses, this cycle is under a year, making the one-year rule applicable.
Current assets include cash and resources expected to be realized, sold, or consumed within one year or the operating cycle. They are typically listed by liquidity:
Assets not meeting the current criteria are non-current or long-term. These resources are expected to be held and used for more than one year or operating cycle and are fundamental to long-term operations. They include:
Proper classification helps assess short-term liquidity and long-term operational capacity.
With assets categorized, attention shifts to liabilities – amounts owed by the business to external parties from past events, requiring a future outflow of resources. Like assets, liabilities are separated into current and non-current categories based generally on a one-year or operating cycle timeframe. A liability is current if expected to be settled within this period, held for trading, due within twelve months, or if the entity cannot unconditionally defer settlement beyond twelve months.4Deloitte Accounting Research Tool. ASC 470-10: Debt – Balance Sheet Classification – General
Current liabilities are short-term obligations due within one year or the operating cycle. Common examples include:
Obligations not meeting current criteria are non-current or long-term liabilities, due more than one year or operating cycle from the balance sheet date. Examples include:
Accurate listing provides insight into the company’s financial structure and future cash needs.
With assets and liabilities organized, the final component is equity, representing the residual interest in assets after deducting liabilities – the owners’ net worth. The basic calculation is Equity = Assets – Liabilities, but the balance sheet details its components.
Equity primarily consists of contributed capital and retained earnings. Contributed capital is funds invested by owners, mainly through stock for corporations. Common stock represents basic ownership, recorded at par value, with amounts above par recorded as “Additional Paid-in Capital” (APIC). Preferred stock carries specific rights over common stock. Accounting for stock issuance follows guidelines like ASC 505.6PwC Viewpoint. Equity Guide: Accounting for the Issuance of Capital Stock (ASC 505)
Retained earnings represent accumulated profits not distributed to owners. The calculation is: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends = Ending Retained Earnings. Net income increases retained earnings; net losses and dividends decrease it. A negative balance is an accumulated deficit.
Treasury stock, the company’s own shares repurchased from the market, also affects equity. It is recorded at cost and shown as a deduction (contra-equity account), reducing total equity. Reissuance adjustments affect equity accounts, not the income statement.
Total equity can also include Accumulated Other Comprehensive Income (AOCI). Comprehensive income includes net income plus other specific gains and losses bypassing the income statement (like certain unrealized investment gains/losses or foreign currency adjustments), accumulating in AOCI. Standards like ASC 220 guide reporting.7PwC Viewpoint. Comprehensive Income Guide: General Reporting Requirements (ASC 220) Summing contributed capital, retained earnings, and AOCI, less treasury stock, yields total equity.
After assembling all sections, final checks are necessary. The fundamental verification is ensuring the accounting equation holds: Total Assets = Total Liabilities + Total Equity. An imbalance signals errors like omitted transactions, incorrect entries, miscalculations, or classification mistakes.
Comparing current balance sheet figures to previous periods is valuable. Presenting comparative balance sheets allows for trend analysis. Significant fluctuations warrant investigation (e.g., a large rise in receivables or a drop in cash). This horizontal analysis helps identify anomalies and assess the company’s trajectory. Accounting standards encourage comparative reporting.
A detailed review of individual line items against supporting documentation ensures accuracy. Reconcile cash with bank statements, receivables with subledgers, inventory with counts, and fixed assets with schedules. Verify correct current/non-current classification. Ensure assets and liabilities are offset only when permitted by standards like ASC 210 or IAS 1.8IAS Plus. IAS 1 — Presentation of Financial Statements
Review the accompanying notes to the financial statements, which provide context and detail. Disclosures should comply with applicable frameworks (GAAP or IFRS), covering significant accounting policies, estimation methods, contingencies, debt details, fair value measurements (guided by standards like ASC 820), and subsequent events.9PwC Viewpoint. Fair Value Measurements Guide: The Definition of Fair Value (ASC 820) Clear and complete disclosures are the final step in preparing a reliable balance sheet.