How to Prepare a Balance Sheet
Businesses require a lot of paperwork, from cash flow statements to profit and loss statements to income statements and so much more. Even if the industry is getting more paperless, everyone is still stuck with the tedious work. Many of these financial statements are broken down into multiple parts, so there’s even more effort that goes into creating them. That’s why most people work with bookkeeping companies like ours in Miami Beach. For example, the format of an income statement includes income from continuing operations, discontinued ones, net income and extraordinary items.
Balance Sheet: An Overview
Before explaining how to prepare a balance sheet, let’s look at what it is first. In simple terms, a balance sheet reflects a company’s net worth. It includes a company’s assets, liabilities and the owner’s equity. Assets can produce value for a company, such as property, equipment, inventory as well as more intangible items like brand recognition, copyrights, computer programs and chemical formulas. Liabilities on the other hand, are obligations of the company such debt and other responsibilities. It can include bank loans, interest, dividends payable and accrued federal taxes.
A balance sheet tracks growth for a company, since owners and managing partners can know with one quick look where the company stands. This kind of financial statement has two columns of items: one listing the assets, while the other lists the liabilities and the owner’s equity in the business. In other words, assets=liabilities + owner’s equity. Don’t forget, you can always go with outsourced bookkeeping services and you never have to deal with creating a balance sheet yourself.
Assets: From Petty Cash to Brand Recognition
If you’re looking to grow your business and potentially seeking out new partners or perhaps silent investors, a balance sheet will reflect how much of an investment your company is truly worth. So let’s take a closer look at assets, which are divided into two categories on a balance sheet: current and non-current.
Current assets may include:
-Cash: petty cash, deposits in checking and savings, even short-term investments that can turn into cash fast
-Marketable securities: stocks, bonds and securities that are easily tradeable
-Accounts receivables: all money owned to company
-Inventory: raw materials, work in progress and finished goods
-Pre-paid expenses: insurance coverage, rent, legal services and anything that has been paid in advance
Non-current assets may include:
-Property: Your Miami Beach bookkeeping company reminds you that this category isn’t just for land and buildings, it’s also for items like equipment, machinery, furniture, fixtures, vehicles and construction in progress
-Intangible property: Copyrights, patents, trademarks and goodwill like domain name, licenses, reputation and trade secrets
Liabilities: From Credit Card Debt to Mortgages
Just like assets, liabilities are also split into two categories known as current, which are typically due within a year, and fixed (or long term). But at the end of the day, liabilities all come down to obligations.
Current liabilities may include:
-Payables: All money owned…to suppliers, vendors and anyone else
-Accrued expenses: These types of expenses don’t really have invoices, such as wages, employee benefits like medical insurance or retirement plan contributions, as well as taxes
-Short-term borrowing: From credit card bills to lines of credit
-Unearned revenue: revenue from a product or service that hasn’t been delivered yet
Fixed liabilities may include:
-Mortgages: Borrowing money to build or buy property like building, factory and facilities
-Loans: Borrowing money for company cars, buying equipment and borrowing from shareholders
-Bonds: This category includes debt instruments issued to raise capital. But the Miami Beach bookkeeping company reminds you this specific liability typically doesn’t apply to small businesses
Owner’s Equity: Positive or Negative?
Now the last part needed to prepare a proper balance sheet; the owner’s equity. It represents the value of owner’s interest in the company; in other words the amount by which the assets surpass the liabilities. The owner’s equity can be made up of three categories: the money originally infused into business by owner, additional capital infused after original funding as well as kept revenue made from business but not redistributed to owner. If assets surpass liability than the business has positive equity, if it’s the other way around where there are more liabilities than assets, the equity is negative which can lead to trouble in the future.
Build That Balance Sheet or Go For Outsourced Bookkeeping
Now that you know all about assets and liabilities, it’s time to put all of that knowledge into practice. List your assets in the left column, with a total at the end. Do the same for liabilities and place it on the right. Don’t forget the total of liabilities and then add that amount to the owner’s equity. When the sum of liabilities and owner’s equity are totaled, the amount should equal the one of assets (your left column). Hence, the balance!