A balance sheet is a financial statement used to show a person's or company's assets and liabilities at a specific point in time. Balance sheets are considered a snapshot of financial status. One balance sheet will not show profit or loss, but accountants compare balance sheets to gauge performance. Specifically, end-of-year balance sheets are compared with the previous year's balance sheet to see clearly what has come in and out during the past year. The goal, of course, is for total assets to exceed total liabilities, which means profit.
List the value of all your assets. Whether the balance sheet is for business or personal use, anything that is owned is an asset. Assets include: bank accounts, property, inventory, retirement plans, mutual funds and stock, jewelry, art or cars. Anything pre-paid is considered an asset. For example, some companies pre-pay their rent or insurance meaning they have paid for something but not received the service yet.
List the value of all your liabilities. Liabilities are your debts such as the amount remaining on a home mortgage, car loans, lines of credit, payroll due, taxes and credit card debt. If you owe money on something, like a car, the part of the car you own is an asset and the amount you have financed is a liability.
Separate the assets and liabilities into sections. Assets should be separated by fixed assets (property, plant and equipment that isn't going anywhere), current assets (cash, inventory and accounts receivable), and pre-paid expenses. Liabilities should be separated by long-term (things due in over a year such as a mortgage) and short-term (items due within the next year).
Calculate net worth. The assets and liabilities should always balance (hence the name of the balance sheet). To make this happen use the following equation: Assets = Liabilities + Net Worth. Once you know the amount of your assets and liabilities use this formula to calculate net worth. In other words, Net Worth = Assets - Liabilities. Net worth is usually listed below liabilities.
Analyze the data. Most accountants use current ratio, quick ratio, working capital and debt/worth ratio to analyze the health of the company based on the balance sheet. Current Ratio = Total Assets/Total Liabilities and is a measure of the company's financial strength overall. Quick Ratio = Current Assets - Inventory/Current Liabilities is a measure of the company's liquidity. Working Capital = Current Assets - Current Liabilities measures how well a company can handle hard times. Negative working capital should be a big red flag that something is wrong. Debt/Worth Ratio = Total Liabilities/Net Worth is a measure of how dependent a company is on their debt financing.
Write a summary for upper-level management. Non-accountants may have trouble digesting the information and ratios presented. Writing a text summary of the year's financial performance can help in identifying weaknesses and strengths.
Compare to the balance sheet from the same period last year. Check ratios first to see if things have improved.