The balance sheet is basically a summary of financial condition of the business at a certain time. At any time the assets (anything the business owns which is worth something) must equal the liabilities and the owner’s equity. Liabilities are claims of creditors against the assets of a business. Owner’s equity is made up of investments into the business and retained earnings. The balance sheet is usually shows multiple years so it can easily be compared. Yes, I know it’s boring…
The first thing put on the balance sheet is the current assets. These includes things such as cash, accounts receivable (money owed to the business for purchases), and notes receivable (promise to be given money in the future). These assets can be easily converted to cash within one year.
Then fixed assets are added, these include things like land, machinery and vehicles.
After that, intangible assets are put onto the amazingly boring list. For example, goodwill or trade names.
Any other assets will be added that cannot be classified in any of the above.
All the above assets should be added together to make the net assets.
On the other side of the balance sheet, we have to list all the liabilities and the owner’s equity. Firstly we start with the current liabilities. These are liabilities which can be paid for within a year. Some examples are wages, tax, interests and accounts payable(money owed to other businesses for purchases).
The balance sheet should include the working capital, which is the current assets minus the current liabilities.
Next up are long term liabilities, the debts the business has to pay after at least a year.
After that we finally add the shareholders’s equity, this is all the money which has been invested into the businesses and the remained profit which has been kept in the business.
When that’s all done, we sum up all the liabilities and stockholder’s equity, which if done right, should be equal to the total assets. This is known as the capital employed.
Exampled of balance sheet layout:
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