HOW TO PREPARE A BASIC BALANCE SHEET?

WHAT IS A BALANCE SHEET?

A balance sheet is a financial statement that communicates the so-called “book value” of an organization, as calculated by subtracting all of the company’s liabilities and shareholder equity from its total assets.

A balance sheet offers internal and external analysts a snapshot of how a company is currently performing, how it performed in the past, and how it expects to perform in the immediate future. This makes balance sheets an essential tool for individual and institutional investors, as well as key stakeholders within an organization and any outside regulators.

Most balance sheets are arranged according to this equation:

Assets = Liabilities + Shareholders’ Equity

The equation above includes three broad buckets, or categories, of value which must be accounted for:

1. Assets

An asset is anything a company owns which holds some amount of quantifiable value, meaning that it could be liquidated and turned to cash. They are the goods and resources owned by the company.

Assets can be further broken down into current assets and noncurrent assets.

·         Current assets are typically what a company expects to convert into cash within a year’s time, such as cash and cash equivalents, prepaid expenses, inventory, marketable securities, and accounts receivable.

·         Noncurrent assets are long-term investments that a company does not expect to convert into cash in the short term, such as land, equipment, patents, trademarks, and intellectual property.

2. Liabilities

A liability is anything a company or organization owes to a debtor. This may refer to payroll expenses, rent and utility payments, debt payments, money owed to suppliers, taxes, or bonds payable.

As with assets, liabilities can be classified as either current liabilities or noncurrent liabilities.

·         Current liabilities are typically those due within one year, which may include accounts payable and other accrued expenses.

·         Noncurrent liabilities are typically those that a company doesn’t expect to repay within one year. They are usually long-term obligations, such as leases, bonds payable, or loans.

3. Shareholders’ Equity

Shareholders’ equity refers generally to the net worth of a company, and reflects the amount of money that would be left over if all assets were sold and liabilities paid. Shareholders’ equity belongs to the shareholders, whether they be private or public owners.

Just as assets must equal liabilities plus shareholders’ equity, shareholders’ equity can be depicted by this equation:

Shareholders’ Equity = Assets - Liabilities

DOES A BALANCE SHEET ALWAYS BALANCE?

A balance sheet should always balance. The name itself comes from the fact that a company’s assets will equal its liabilities plus any shareholders’ equity that has been issued. If you find that your balance sheet is not truly balancing, it may be caused by one of these culprits:

·         Incomplete or misplaced data

·         Incorrectly entered transactions

·         Errors in currency exchange rates

·         Errors in inventory

·         Miscalculated equity calculations

·         Miscalculated loan amortization or depreciation

HOW TO PREPARE A BASIC BALANCE SHEET

Here are the steps you can follow to create a basic balance sheet for your organization. Even if some or all of the process is automated through the use of an accounting system or software, understanding how a balance sheet is prepared will enable you to spot potential errors so that they can be resolved before they cause lasting damage.

1. Determine the Reporting Date and Period

A balance sheet is meant to depict the total assets, liabilities, and shareholders’ equity of a company on a specific date, typically referred to as the reporting date. Often, the reporting date will be the final day of the reporting period.

Most companies, especially publicly traded ones, will report on a quarterly basis. When this is the case, the reporting date will most usually fall on the final day of the quarter:

·         Q1: March 31

·         Q2: June 30

·         Q3: September 30

·         Q4: December 31

Companies that report on an annual basis will often use December 31st as their reporting date, though they can choose any date.

It's not uncommon for a balance sheet to take a few weeks to prepare after the reporting period has ended.

2. Identify Your Assets

After you’ve identified your reporting date and period, you’ll need to tally your assets as of that date.

Typically, a balance sheet will list assets in two ways: As individual line items and then as total assets. Splitting assets into different line items will make it easier for analysts to understand exactly what your assets are and where they came from; tallying them together will be required for final analysis.

Assets will often be split into the following line items:

·         Current Assets:

o    Cash and cash equivalents

o    Short-term marketable securities

o    Accounts receivable

o    Inventory

o    Other current assets

·         Noncurrent Assets:

o    Long-term marketable securities

o    Property

o    Goodwill

o    Intangible assets

o    Other noncurrent assets

Current and noncurrent assets should both be subtotaled, and then totaled together.

3. Identify Your Liabilities

Similarly, you will need to identify your liabilities. Again, these should be organized into both line items and totals, as below:

·         Current Liabilities:

o    Accounts payable

o    Accrued expenses

o    Deferred revenue

o    Commercial paper

o    Current portion of long-term debt

o    Other Current Liabilities

·         Noncurrent Liabilities:

o    Deferred revenue (noncurrent)

o    Long-term lease obligations

o    Long-term debt

o    Other noncurrent liabilities

As with assets, these should be both subtotaled and then totaled together.

4. Calculate Shareholders’ Equity

If a company or organization is privately held by a single owner, then shareholders’ equity will generally be pretty straightforward. If it’s publicly held, this calculation may become more complicated depending on the various types of stock issued.

Common line items found in this section of the balance sheet include:

·         Common stock

·         Preferred stock

·         Treasury stock

·         Retained earnings

5. Add Total Liabilities to Total Shareholders’ Equity and Compare to Assets

In order to ensure the balance sheet is balanced, it will be necessary to compare total assets against total liabilities plus equity. To do this, you’ll need to add liabilities and shareholders’ equity together.