What is the meaning of a balance sheet? Download your balance sheet for a free template.

Knowing how to create an accounting balance sheet will aid in getting a better understanding of the state of your company.

It will show you a picture of your liabilities and assets at a specific time. This will allow you to determine if your company has a financially sound situation.

Balance sheet definition

The balance sheet can be described as a financial report which reveals:

• What assets do you own for your business (assets)
• the amount your company owes (liabilities)
• Equity of shareholders (the amount of money that you invest in the equity of shareholders and generated by your company)

The document’s name suggests that each section that comprises your account balance must be in balance. The concept is that the amount your business owes you and its funds on hand are the funds that fund its assets.

The total assets must equal the sum of your equity and liabilities. The formula for your balance sheet that you require is:

Assets = Liabilities + Shareholder Equity

What is a financial statement? Position?

It is also possible to see the balance sheet, also known as a statement of financial situation, that shows the value of a company at a specific date.

A financial statement assists a company in keeping track of its inflows and outgoings.

Balance sheets are one aspect of accounting for business that you can utilize to comprehend your financial standing – other reports to examine are your loss and profit account or cash flow.

What exactly does a balance sheet reveal?

A balance sheet can be useful because it allows you to examine:

the ease with which you can gain access to money by examining your current assets

the amount of financial risk you’re willing to take by comparing equity with your obligations

the efficiency of your company to earn revenue from its assets by looking at your balance sheet concerning your profit and loss accounts

Download the balance sheet template

The assets, liabilities, and shareholders’ equity are reduced more on the balance sheet.

Download the free balance sheet template and cross-check it against terms used within the financial statement so you’re aware of how to complete it.

This document or template is a reference only. It’s no financial guidance. If you are a limited company, you won’t be able to utilize our balance sheet to prepare legal accounts.

It’s best to talk with a professional advisor or accountant about your company’s finances.

How do you interpret the balance sheet?

A balance sheet format typically comprises the company’s assets first, then its liabilities, and finally the equity of shareholders.

It is important to know the distinction between the different types of assets, such as accounts receivable, cash, and inventory (see below), and what they mean to a company’s financial health.

Concerning liabilities On the liabilities side, the most important aspect of being aware is the distinction between the current and long-term.

When looking at a balance sheet, the goal is to determine whether the company’s financials are in balance, in which case the value of assets is the same as the total value of shareholders’ equity and liabilities.

Balance sheet example: assets

It is located to the balance sheet’s left (or the top). You divide what your business owns into current assets and fixed assets.

It’s in the order of liquidity, meaning that those assets you can convert into cash faster are first. Learn more about business liquidity to learn more about the process.

Current assets are those you’ll need day-to-day to run your business. They’ll usually use them in a year (for instance, the funds in your bank account for business).

Current assets comprise:

Cash – This could be cash you’ve got readily available such as an account at your banks, or you’ve got cheques that you have to pay to (a projection of cash flows can help you determine your cash flow inflows and outflows for 12 months)

accounts receivable are the funds that are due by you over the near-term such as outstanding invoices you’ve mailed to clients and customers

inventory – the inventory of your stock of items, works-in-progress, and other items which you’ll sell to your customers (you need to have these items already)

Short-term investment – investments that you can easily change in cash (equities aren’t in this list since their value fluctuates regularly)

In addition, you can pay for energy, rent, and business insurance

Assets that are fixed and longer-term investments. They can appreciate and include assets you have that aren’t tangible, such as intellectual property, customer goodwill, and (your company’s reputation).

Fixed assets are:

Property and equipment: the land, buildings, machinery, and equipment (for example, computers) that you own as a business (be sure to not include equipment as an asset that is currently in use in inventory – it must be included here)

leasehold improvements – these are the changes that you’ve made to the commercial property you lease, such as decorating

Equity and other investments are investments that you cannot convert to cash in a hurry. They are subject to fluctuations in value

less depreciation accrued, which is how you determine whether assets are likely to depreciate in time. For example, if you anticipate an expensive computer to last for five years, you can multiply PS1,500 by 5 to calculate an amortization rate of PS300 per year. There is room to add more assets in our template for a balance sheet, such as intangible assets such as intellectual property.

Balance sheet example: liabilities

Generally, a balance sheet has liability on the left (or at the top). As with assets, you can divide liabilities into current liabilities and long-term ones.

Current liabilities include utilities and rent that will be due within twelve months. On the other hand, long-term liabilities comprise obligations like loans to be paid within 12 months.

In Our balance sheet templates, current liabilities are:

accounts payable – the money your company is owed for the purchase of items and services

Accrued compensation – the money your company owes for products and services you haven’t received and for which you haven’t received invoices until now.

tax payable on income – money that you owe in taxes

Unearned revenue is the money you receive from a client or a customer for work your company hasn’t yet completed

• other obligations – present liabilities that don’t fall in the above categories.

The long-term liabilities are:

• mortgage – loans with a long-term term for the land or property your company owns

Other long-term obligations – may include tax-deferred payments and other obligations that aren’t required to repay for a minimum of 12 months.

An example of a balance sheet is “Shareholders’ Equity” (or the owner’s equity)

The balance sheet is beneath the liabilities section. It is the sum of cash generated by your business, namely its net assets.

The formula for the balance sheet in the section described above is

Shareholders’ Equity = Total Assets – Total Liabilities

On our balance sheet template, you will find this section:

capital stock shares that a company owns and sells (essentially, it’s a liability as this is the amount the company would owe its owners if it were to be sold)

retained earnings are the profits that have been retained by the business instead of being distributed to the owners

If you’re a sole trader or an unincorporated business, You might be thinking about the equity of shareholders. It is the amount you’ll end up with if you choose to stop trading or sell your business assets and settle the liabilities of your business. Our article on business equity contains more details.

In this scenario, capital stock is the amount you put into the company to set it up before you begin to earn profits. Retained earnings are essential “the remainder’ – that’s the money that the company has earned when it’s been in operation, which hasn’t been put into things like paying bills or purchasing items. It can be paid to the sole trader.

Balance sheet and the statutory accounts

If you operate a limited company, the balance sheet is one of your year-end (statutory) balance sheets. The balance sheet must meet accounting standards, and you must speak with your tax advisor or accountant as you will not be allowed to use this template for your balance sheets.