How to create (prepare) a balance sheet

As someone who's taught accounting, economics, and finance, I'll show you how to put together a Balance Sheet. And I'll walk you through the entire process step-by-step in plain-English. So can easily understand and master.

Instructions

1. ** What is a Balance Sheet? **

   It's one of the most important financial statements. And it helps you uncover what a company or individual owns, owes, and has left over.

   Yes, you can put one together for a business or an individual. The main difference between the two is that company balance sheets are more complex and detailed. But the basic information that goes on there is very similar.

2. ** Balance Sheet Sections **

   A balance sheet is broken into four main sections:

   1) Heading
   2) Assets
   3) Liabilities
   4) Owners' or Stockholder's Equity

   In the next series of steps, we'll examine each one of these individually and then put them all together.

3. 

   ** Heading **

   This section is where you'll find the name of the company or person who's balance sheet you're looking at.

   It will also indicate which financial statement it is. In our case, we're looking at a balance sheet.

   And lastly, it'll tell you for what period of time the information is for. You see, balance sheets can be prepared for any date you'd like. So it's important to know which date the information on the balance sheet is for.

   Here's a picture of what this section will look like.

   For instance, I can prepare a balance sheet for May 25, 2008. Or I can do it for May 31, 2008. Or I can do one for April 30, 2008. It makes a difference because the account balances you'll see on the balance sheet could be different. So it's very important to tell readers what date your figures are for.

4. 

   ** Assets **

   Simply put, assets are things of value you or a company owns.

   For example, a business might have things like:

   a) Cash / bank accounts
   b) Accounts Receivable--credit sales where the money will be received later on

   c) Inventory
   d) Building
   e) Equipment
   f) Investments
   g) Supplies

   All of these things have "value" to a company. In other words, a business uses them as a way to generate revenue (make money). So business hold assets in order to generate revenue.

   For an individual, assets might be:

   a) Cash / bank accounts
   b) Jewlery and other valuables
   c) Personal Computer
   d) Investments
   e) Car
   f) TV

   And just like a business, individuals have things of value that they own. But unlike a business, individuals don't hold assets to generate revenue.

   On a balance sheet, you'll see a listing of all the various assets a business or individual holds. Right next to each one will be it's corresponding balance (value).

   The picture to your left gives you a sample of what the asset section of a balance looks like.

5. 

   ** Liabilities **

   In a nutshell, liabilities are the unpaid financial obligations of an individual or a business. You owe the money, but haven't made the payment(s) yet.

   For example, you have a student loan in the amount of $50,000. You've made payments so far totalling $10,000. This means you have $40,000 left to repay. So your student loan payable would be that unpaid $40,000.

   Can you just forget about your loan and not pay? No! Why not? Because you are financially obligated to repay the money. And there are consequences for failing to do so. That's what liabilities are all about.

   Here is a list of some common business liabilities:

   a) Accounts Payable--money we owe to someone else that hasn't been paid yet

   b)Salaries Payable--wages owed to our employees that hasn't been given them yet

   c) Income Taxes Payable--money owed to the IRS that hasn't been paid yet

   For an individual, common liabilities would be:

   a) Mortgage--the amount left on your mortgage
   b) Car Loan--the remaining amount on your car loan
   d) Credit Card bills--the amount you still owe on your credit card(s)
   d) Student Loans--how much you owe on your student loan(s)

   TIP: Another name for liabilities is payables. If you're taking an accounting or bookkeeping class, you may encounter them both. They mean the same thing!

   To see what the liability section of a balance sheet looks like, take a look at the picture to your left.

6. ** Equities **

   The last section of a balance sheet is the Owners' or Stockholders' Equity section.

   NOTE:

   a) Owners' Equity is generally used when dealing with individuals, sole-proprietors, and partnerships

   b) Stockholders' Equity is used for corporations

   They are the same as far as purpose. However, the items that appear within these sections will differ.

   Here are some common items you'll find under the Owners' or Stockholders' Equity section:

   a) Retained Earnings--a running total of your business' profits or losses. In other words, how much your business has made from day 1 to now.

   b) Common Stock--the value of common stock your company has issued

   c) Dividends Paid--the amount of common stock dividends the company has paid

   TIP: The equity section of a balance sheet represents the portion of assets that the business itself owns. In other words, the difference between total assets and total liabilities.

   You see, liabilities are used to finance or purchase assets. So you're "borrowing money" to buy them. The equity section represents your share in the assets you bought with that borrowed money.

   For example, you bought $23,000 car. You paid $13,000 in cash and financed the remaining $10,000.

   The bank owns 10,000 of that car, and you own the remaining 13,000. So that 10,000 you borrowed is your liability (what you owe). And the 13,000 is your owner's equity in the car (the portion you own).

   Here's a picture of what the equity section looks like.

7. 

   ** Putting it all together **

   Now that we've learned about the various sections of a balance sheet, we can see how it would look when it's combined into one.

   The picture on the left shows you the entire balance sheet with the information given in the previous steps.

   When you look at it, you'll see that assets are on the left, while liabilities and equities are on the right. This is one way to format a balance sheet. And it's called the account form.

   Many individuals use this particular format when putting their balance sheets together.

   However, some businesses use a slightly different format called the report form. It's gives you the same exact information, but liabilities and equities are shown directly below assets.

   In other words, it's all in one column instead of some on the left and other pieces to the right.

   Both formats are perfectly acceptable so you can choose to use whichever you most prefer. The most important thing is to have the correct information for the balance sheet date. And have it in the appropriate spot.

Tips & Warnings

• For simplicity, you can list your asset values at either: Cost, market value, or estimated value

• Liabilities should be the actual amounts you own--the remaining balances as of yet unpaid

• Owners' Equity is simply the difference between total assets and total liabilities

• I suggest using a balance sheet to help you manage your money or get a hold on your finances

• I also suggest you prepare one yearly at the very least; monthly would be much better

• Keep a close eye on your liabilities! If they get too large, then you might be in or digging yourself into a financial hole!

• Also watch your equity. If it's steadily decreasing, that's not good and could be a sign you're in or heading for financial trouble!

• Keep copies of your past balance sheets so you can monitor how your financial picture has changed over time

• You can also play "what if's" with a balance sheet by adjusting your figures to see how it would effect your overall totals

• For instance, decrease your cash and credit card liability to see what your fiancial picture would be like if you pay off or more of your credit card. This is the beauty and benefit of doing a balance sheet!

• What I gave you is the basics of putting together a balance sheet

• For increased accuracy, it's better to have a professional prepare it