A balance sheet provides a snapshot of the financial position of a business at a specific moment in time, including what it owns, what it owes and the value of shareholder equity.
In this article, we explore what is included in a balance sheet and how to create your own, including a balance sheet example and an illustration of a balance sheet template.
What are the main parts of a balance sheet?
There are three main parts to a balance sheet. These are:
- Assets.
- Liabilities.
- Shareholder equity.
Assets are what a business owns, liabilities are what it owes and shareholder equity refers to the business owners’ claim on the assets after liabilities, or debts, have been settled. In order to balance your books, the following formula applies:
Assets, liabilities and shareholder equity are broken down further on a balance sheet into short and long-term assets and liabilities, with individual line items to provide greater transparency on what assets and liabilities the business actually holds.
Current assets
Current assets are items that can be easily converted into cash within a 1-year period or less. They are divided into the following line items on a balance sheet:
Cash and cash equivalents
This is money available in your business such as in your bank accounts, currency and cheques.
Marketable securities
These are investments that you can easily sell within a year, such as bonds.
Accounts receivable
This is money owed to your business from clients or customers.
Inventory
This includes products ready for sale, products being made and raw materials.
Prepaid expenses
These are items you have paid for in advance, such as office rent or business insurance.
Long-term assets
Long-term assets are those that cannot be easily converted into cash within a 1-year period. They are itemised on the balance sheet as follows:
Fixed assets
These are tangible items such as property, machinery and equipment.
Long-term securities
These are investments that cannot be easily sold within 1-year. For example, real estate.
Intangible assets
These are non-physical items, such as software, trademarks, copyrights and patents.
Current liabilities
Current liabilities are money the business owes to third parties that must be repaid or settled within a 1-year period. For example, short-term loans, salaries, and taxes due for payment.
Long-term liabilities
Long-term liabilities are money that the business owes to third parties that must be repaid beyond a 1-year period. For example, deferred tax and pension obligations.
Shareholders’ equity
Shareholder equity is how much money the business owners have in the company after deducting total liabilities from total assets.
When to prepare a balance sheet
Balance sheets are often prepared monthly, quarterly or annually. But you can prepare one at any time. How often you decide to create a balance sheet depends on your business, its size, industry and market. Seasonal businesses, for example, may prepare balance sheets more regularly to ensure enough profit is being made in peak times to survive dips in sales.
The American Express® Business Gold Card has payment terms of up to 54 days, which can come in useful in helping your business to maintain steady cash flow throughout dips in sales¹.
“Some businesses will have a slow pace of change thanks to a secured pipeline and adequate stock, so quarterly evaluation will be enough to identify trends and manage changes,” says John Edwards, CEO of the Institute of Financial Accountants. “For other businesses, a monthly balance sheet is crucial, as market volatility can drive quick changes within the business.”
Let’s work through the steps involved in creating your own basic balance sheet.
Balance sheet step 1: assets
The first step in generating a simple balance sheet is to tally your assets for the reporting period. For example, for the month, quarter or year. You will see in the balance sheet template below, that these are broken down into current and long-term assets, with individual line items underneath, as well as totals. You can adjust these line items to your business.
Balance sheet step 2: liabilities
Once you’ve calculated your business assets, you can add up its liabilities. As with assets, these are shown in the balance sheet template below as current and long-term liabilities, with examples of individual line items underneath. You can amend these line items so that they’re applicable to your business. For example, these might be short-term debt, interest payable, salaries due accounts payable and dividends that have been authorised but not yet issued.
Balance sheet step 3: shareholders’ equity
The final section of the balance sheet is shareholder equity, which is often broken down into common or preferred stock as well as retained earnings. Retained earnings refer to company profits that are reserved for reinvestment. Shareholder equity takes the total assets of the business and subtracts its total liabilities, which means it can be a positive or a negative value.
Positive shareholder equity means the company has enough assets, or available cash, to cover its liabilities, or debts. On the other hand, a negative value suggests that the company does not have enough money to meet its debts and obligations.
Balance sheet template
Below is an illustration of a simple template you can use to create a working balance sheet for your own business. Create a spreadsheet using these fields and have a go at populating it using the steps above.
What does it mean to gross up the balance sheet?
Grossing up a balance sheet refers to allocating an extra amount of money onto a payment to cover future costs such as income taxes. It’s usually done for one-off payments, such as reimbursements, relocation expenses or bonuses. For example, if an employee is paid £100,000 per year and has an income tax rate of 20%, an employer might gross up the salary by 20% to £125,000, to account for the income tax payment.
What are some examples of off-balance sheet items?
Some items are not included in a balance sheet and these are known as ‘off-balance sheet items’. They are typically items that are not directly owned by the company or not a direct obligation of the company. For example, operating leases, guarantees or letters of credit, joint ventures and research and development activities.
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