How to Formulate a Balance Sheet

Assets equal liabilities plus owners' equity.

A balance sheet is a financial snapshot of a business. This financial statement measures the amount of company assets against company liabilities to determine the health of the company. A properly formulated balance sheet will do exactly as the name implies, it will balance. The total assets equal the total of the liabilities plus the owners' equity. The items listed within each category are presented in liquidity order, which means the items that are the most easily or quickly converted into cash or are likely to be paid first are listed first.

Things You'll Need

• Chart of accounts
• Calculator or spreadsheet software

Instructions

1. Create an assets header. List all assets accounts from the chart of accounts in the order of liquidity, along with the balance in each account. Common asset accounts include cash, accounts receivable, prepaids and inventory. Add up the assets and place the total on a total line.

2. Create a liabilities header. List all liability accounts from the chart of accounts in the order in which the liability is due to be paid. Include a column listing the balance for each account. Common liability accounts include accounts payable, taxes payable, line of credit, loans payable. Add up the liabilities and place the total on a total line.

3. Create a owners' equity header. List all owners' equity accounts, including retained earnings. List the balance of each account in a separate column. Total the owners' equity accounts and place the total on a total line.

4. Add the liabilities total line to the owners' equity total. Place the total on a line labeled "Total Liabilities and Owners' Equity."

5. Verify the total amount of assets equals the total liabilities and owners' equity.

Tips & Warnings

• You may choose to lump sum like items under one general line description rather than listing out each item. For example, if you have "Equipment Inventory," "Office Equipment Inventory," "Computer Inventory," you may decide to list all three inventories on one line described as "Inventory."

• If the total assets do not equal the total liabilities and owners' equity, double check that you have accounted for all the balance sheet accounts listed in your chart of accounts.

• Remember to roll your current profit or loss from your income statement into your retained earnings amount to arrive at a correct owners' equity total.

References

• College-Cram.com: Balance Sheet
• Virtual Advisor: Preparing a Balance Sheet
• Business Basics for Engineers: The Balance Sheet