Knowing how to make a balance sheet provides a clear and immediate snapshot of your company’s financial position. It’s a foundational document that summarizes what your business owns versus what it owes at a single point in time.
This financial statement is vital for making informed business decisions and securing funding. Our simple guide will walk you through each step, ensuring you create an accurate and balanced report without any prior accounting expertise.
How to prepare a balance sheet in 5 steps
Creating your balance sheet is a straightforward process. We’ll guide you through it with five clear steps to ensure accuracy from start to finish.
Before you start: download our free balance sheet template
To simplify the process, start by downloading our pre-formatted spreadsheet. It has all the categories you need.
Step 1: Choose the reporting date
First, decide on the specific date for your report. The balance sheet is a snapshot, so all the figures you list must be from this single point in time, whether it's the end of a month, quarter, or fiscal year.
This ensures the report accurately reflects your company’s financial position on that day.
Step 2: List and total your assets
Next, list everything your company owns that has monetary value. These are your assets, and you’ll separate them into two groups based on how easily they can be turned into cash.
- Current assets can be converted to cash within one year. This category includes cash, accounts receivable (money owed to you by customers), and inventory.
- Non-current assets are long-term investments not intended for quick sale. Common examples are buildings, machinery, business vehicles, and equipment.
Once you have listed all your assets, add the two categories together to get your "Total Assets" figure. This number is essential for the final step.
Step 3: List and total your liabilities
Now, list everything your company owes to others. These are your liabilities, which should also be sorted into two categories based on their due dates.
- Current liabilities are debts you must pay within one year. This includes accounts payable (money you owe to suppliers), payroll, taxes, and any short-term loans.
- Non-current liabilities are long-term financial obligations due more than a year from the reporting date. This typically includes long-term business loans and lease obligations.
Add the totals from both categories to calculate your "Total Liabilities." This figure represents your company's complete debt obligations.
Step 4: Calculate shareholders' equity
Shareholders' equity represents the net value of your business. It's what would remain for the owners if you sold all assets and paid off all liabilities.
To find it, use this simple formula:
Total Assets - Total Liabilities = Shareholders' Equity
This is the final component you need to ensure your balance sheet balances correctly.
Step 5: Compare assets to liabilities and equity
This final step is how to make a balance sheet balance, confirming its accuracy with the fundamental accounting equation.
Assets = Liabilities + Shareholders' Equity
If your "Total Assets" figure doesn't match the sum of your liabilities and equity, you must review your report to find and correct the error.
Understanding the components of a balance sheet
Understanding these three core components answers the question 'how do balance sheets work?' and reveals key insights about your business.
What are assets?
Assets are all economic resources your company owns that provide future economic value. They are split into two key categories to better show your company's liquidity.
Current assets are those convertible to cash within one year, including cash itself, inventory, and accounts receivable. Non-current assets are long-term holdings not easily liquidated, such as buildings, machinery, and patents.
What are liabilities?
Liabilities are your company's financial obligations to other parties. In simple terms, they represent everything your business owes and is responsible for paying in the future.
They are categorized by their due date. Current liabilities are debts due within one year, such as supplier payments (accounts payable) and taxes. Non-current liabilities are long-term obligations, like business loans, due more than a year away.
What is shareholders' equity?
Shareholders' equity is the net worth of your company from an accounting perspective. It represents what the owners truly own after all debts have been settled.
This value comes from two main sources: money invested by the owners (contributed capital) and profits the company has reinvested back into the business (retained earnings).
The fundamental accounting equation
The fundamental accounting equation is the core principle of how to prepare a balance sheet accounting, ensuring the document is always in balance.
Assets = Liabilities + Shareholders' Equity
If assets don’t equal liabilities plus equity, the sheet is wrong.
How to do a balance sheet reconciliation
Don't worry if your numbers don't add up at first; a balance sheet reconciliation is just the process of finding and fixing common errors.
Common reasons why your sheet doesn't balance
- Simple data entry mistakes, like a misplaced decimal or transposed number, are the most common source of errors.
- Misclassifying an account, such as listing a long-term loan as a current asset, will cause an imbalance.
- Incorrectly calculated retained earnings, often from a failure to carry over profits, will unbalance the sheet.
- Omitting or duplicating entries, like an old invoice or double-counted equipment, is another common mistake.
A simple check to find errors
First, find the exact difference between your Total Assets and the sum of Total Liabilities and Equity. This specific amount is your first clue.
With that number in mind, scan your individual line items. Often, the error is a single transaction matching that amount, which was either duplicated or forgotten. This simple check can save you hours of searching.
How to analyze your balance sheet
Creating the balance sheet is the first step; its real value comes from analyzing what the numbers reveal about your business's financial health.
What to look for: key indicators of financial health
- Start with your cash position. Do you have enough cash and liquid assets to cover short-term debts? Healthy cash flow is a vital sign of stability.
- Compare your total liabilities to your total assets. A high proportion of debt could indicate risk, showing the business relies heavily on borrowing.
- Analyze the composition of your assets. Are they primarily liquid, like accounts receivable, or fixed, like property and equipment? This mix affects your ability to respond to opportunities.
Using ratios to understand liquidity and solvency
Financial ratios are simple calculations that help you assess your company’s performance and stability more precisely. These two are a great starting point.
- The current ratio measures your liquidity, or your ability to pay short-term debts. Calculate it with the formula: Current Ratio = Current Assets / Current Liabilities. A ratio above 1 suggests you have enough liquid assets to cover immediate obligations.
- The debt-to-asset ratio reveals what proportion of your assets is financed by debt, indicating your long-term solvency. Find it with the formula: Debt-to-Asset Ratio = Total Liabilities / Total Assets. A lower ratio is preferable, as it signals less financial risk.
Go beyond the balance sheet with real-time insights
Creating a balance sheet reveals your company's financial position by detailing assets, liabilities, and equity. This snapshot is crucial for understanding your financial health at a specific moment in time.
But a static report is just the start. To make smarter decisions daily, you need dynamic insights. JIM's built-in AI analytics provide real-time sales reports and personalized financial recommendations, turning data into action.
Stop waiting for month-end reports to understand your performance. Gain instant financial clarity and start managing your business proactively. Explore JIM's AI-powered financial tools to see your growth in real time.
