Write a Balance Sheet

A balance sheet is a financial snapshot of an entity, either a business or an individual, at any given date. The "balance" comes from reporting assets and then balancing those assets with the liabilities and equity used to purchase them. Businesses must create balance sheets to analyze the financial health of the business, as well as to comply with their quarterly or annual accounting reports. While it may seem like another language to someone unfamiliar with accounting, a balance sheet is relatively easy to create. Use the following guide to create either a personal balance sheet for your household budget or a balance sheet for your business.

Steps

Personal Balance Sheet

1. Choose a date for your balance sheet. Businesses are required to report their balance sheets on a certain date or dates each year. As an individual, however, you have much more freedom to choose your own date. Just be sure that the amounts that you gather for your debts and assets are all from the same date. List this date at the top of your balance sheet to remind you and also so that you can refer back to your balance sheet later.
   • For regularity, you may choose to do a balance sheet at the end of the calendar year or twice per year at a set date. This will allow you to follow your net worth growth year-by-year.
2. Assemble your financial information. You will need records of your assets as well as your debt. Make sure you have your latest bank statements, the balance on any loans that you owe, and the current market value of your investments. You will also need to approximate the resale value of any valuable assets that you own, including your home, cars, and any valuable jewelry or household items.
   • In general, list any valuable items that you own for which you could find a buyer and what that buyer might pay for the item. This can be determined by researching recent sales of similar items and noting the sale price. This is called the market value.
3. Set up your balance sheet. Unlike business balance sheets, which follow a preset formula, a personal balance sheet can follow any type of organization. In general though, it's a good idea to start by organizing your spreadsheet or paper into two rows or columns, one for assets and one for liabilities (debts). You can either do this by hand or use a spreadsheet program on the computer.
   • There are also pre-made templates and editable online files that can be used to create a personal balance sheet. Try searching Google for "personal balance sheet template" and several options will show up.
   • When judging the size of your balance sheet, know that your assets and liabilities will be listed by category and not by individual item. So if you have a large amount of valuable household items, know that these will be combined and listed as one line item on your balance sheet. Generally, a balance sheet should be no longer than one page.
4. List your assets. In the first column or row, list your asset categories and their values. These include both financial assets as well as "hard" assets like cars and valuables. Listing these assets may require other tables in which you can sum the individual assets in each category. For example, if you have more than one car, you would combine the market value of your cars and list this on the balance sheet simply as "cars." The sum of these assets is your total assets. Include the following assets when making your balance sheet:
   • Cash and account values in the bank (including checking, savings, money market, and certificate of deposit accounts)
   • Investments (including stocks, real estate, mutual funds, college savings accounts)
   • Any money owed to you (like a personal loan to a friend)
   • Resale value of your home(s)
   • Resale value of your vehicle(s)
   • Resale value of personal property (such as jewelry and furniture)
5. List your liabilities. In the second column or row, list your liabilities as well as their value. These refer to any debts that you owe. Specifically, liabilities can include:
   • Student loans
   • Auto loans (what you currently owe)
   • Credit card debt (this includes debt currently incurred even if you plan to pay it off at the end of your statement month)
   • Mortgage balance
   • The balance of any other personal loans
   • Outstanding bill balances (unpaid bills from this month)
   • Taxes due or estimated taxes due next year (for this tax year)
6. Total your assets and liabilities. To get an accurate picture of your net worth, start by totaling your columns or rows at the bottom of the balance sheet to get total assets and total liabilities. At this point, check to see that you haven't omitted anything from either category.
7. Subtract your total liabilities from your total assets. This will give you your net worth. This represents the total value of everything that you actually own. Your net worth will go up as your assets increase and your liabilities decrease. Use your balance sheet to budget your finances and achieve a higher net worth.
   • Keep your balance sheet updated to track your progress towards your financial goals. Try to recalculate at least twice a year. This will help you see the big picture, so to speak.

Business Balance Sheet

1. Understand the basics of the balance sheet. First, know that a balance sheet must always balance. That is, in the end, total assets must equal total liabilities plus owner's equity. Put another way, equity must equal the difference between total assets and total liabilities (Assets - Liabilities). Equity serves the same purpose at net worth does in the personal balance sheet.
   • Businesses usually have to produce balance sheets as a part of annual reporting, but may also need one prepared to show potential lenders or investors.
2. Format your balance sheet. In the left column, you will be listing the assets. In the right column you will list your liabilities at the top and equity underneath it. You can also list all the information in one column, with assets, liabilities, and equity in that order from top to bottom.
   • Official business balance sheets all follow the same format. Try searching Google for "balance sheet template" to find a downloadable or printable balance sheet that you can fill out with your financial information. You can also create your own using a spreadsheet program. Additionally, some accounting programs will create balance sheets for your business, if you've chosen to invest in them.
3. Gather your financial information. In order to create your balance sheet, you will need to have the current values of your assets, including account balances, cash balance, inventory value, and the market values of any investments, land, equipment, and other assets. You will also need to gather all of your liability balances, including any salaries owed, loan balances, and amounts owed to suppliers and utility companies. For equity, you will need to include any money contributed by the owners or investors in the company and a measure of retained earnings (profits reinvested in the company). Much of this information can be found in past financial statements and in the business general ledger.
   • Keep in mind that this information will have to all be from the exact same date. For example a balance sheet for December 31st would total all balances through the end of business on that day.
4. Record your assets. Assets are your company’s resources. These include cash, accounts receivable, inventory, land, buildings, equipment, and more. These will be recorded at the top of your straight line balance sheet or on the left side of a columned one. A classified balance sheet breaks down assets into the following categories:
   • Current assets. This includes cash (any money in bank accounts), accounts receivable (money owed to you), office supplies, inventory (even incomplete items), securities (stocks and bonds), prepaid expenses (like prepaid rent or utilities), and anything expected to be received or used up within a year.
   • Fixed assets. These assets, also called long-term assets, are the revenue-producing items owned by the company, including land, buildings, machinery, vehicles, furniture, and any other objects that are expected to last longer than a year.
     • You should subtract depreciation from these assets so you have an accurate picture of their worth. This reduces overvaluation of assets. For more information, see how to calculate depreciation on fixed assets.
5. Record your liabilities. Liabilities are your company’s debts. These include salaries owed, loan payments, and accounts payable. These will be recorded either under assets or on the right side of the balance sheet, depending on which balance sheet style you are using. They are split into two categories:
   • Current liabilities. These are anything due within the next year, such as accounts payable (to suppliers or other companies), taxes, and payroll. It can also include the portion of long-term debt due within the next year.
   • Long-term liabilities. This includes loans, mortgages, and leases that will be repaid more than one year from the date on the balance sheet.
6. Record your equity. Owner's equity is how much the owners or stockholders have invested in the company. It also includes retained earnings, or net profits that are kept within the company. These will be recorded below liabilities, regardless of which balance sheet format you are using.
7. Total your categories. At the bottom of each major category (assets, liabilities, and equity), sum each line item to get a total. Use the balance sheet equation (Assets=Liabilities + Equity) to check if your amounts balance. If they do not, this means that you've overlooked or incorrectly reported some part of your balance sheet. Go back and check to see if you can locate your mistake.
   • In some cases, you may be unsure what you have contributed or retained to the company. In these cases, just subtract liabilities from assets to get the owner's equity.
8. Analyze your balance sheet. One you have a completed balance sheet, you can analyze it to determine certain important metrics that measure the financial health of your business. Specifically, there are four simple ratios that can be calculated from this information:
   • The current ratio is an approximation of a business's ability to pay it's current debts. Find the current ratio by dividing current assets by current liabilities. Values over 1 are considered stronger and those under 1 are considered weak.
   • The quick ratio, or "acid test," determines a company's ability to pay it's current liabilities with it's most liquid assets. This is found by subtracting a company's inventory from the sum of it's cash and cash equivalents and dividing that total by it's total current liabilities. Generally, results between 0.5 and 1 are considered healthy.
   • The debt-worth ratio analyzes a company's dependency on debt. This measure is calculated by dividing owner's equity by total liabilities. In theory, no one result is better or worse here, but a business with a higher debt-worth ratio may be considered over-reliant on debt financing.
   • The fixed-worth ratio determines how much the company has invested it's own money in tangible assets. This is calculated by dividing total fixed assets by owner's equity. A low ratio means a smaller investment in fixed assets and thus, less risk in case of business failure and liquidation.

Sample Balance Sheet

Doc:Balance Sheet

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