Expenses are an important part of any business, and owners must keep a close eye on them to run a successful operation. To make excellent business decisions, not only expenses but also revenue earned must be properly analysed.
Businesses with healthy balance sheets have a better chance of surviving economic downturns and thriving when things improve. This document, which depicts your total assets, liabilities, and net worth, provides a rapid snapshot of your fiscal viability and can be used to advise lenders, investors, or other key stakeholders about your company. So, what does the correct balance sheet format look like, and how can you improve your own?
An accurate balance sheet is more than just having more assets than liabilities. Strong balance sheets are those that are formulated to assist the entity's corporate objectives while also maximising financial performance.
The majority of the following characteristics will be found in the correct balance sheet format: a balanced capital structure, positive cash flow, intelligent working capital, and income-generating assets.
Have you ever been in a situation where you needed to formulate a balance sheet? Here's what you need to know about balance sheets, including how they function and why they're so important in business, as well as the broad steps you can take to develop a basic balance sheet for your company.
What Is the Definition of a Balance Sheet?
A balance sheet refers to a financial statement that shows the assets, liabilities, and equity of a corporation at a specific point in time. The correct balance sheet format serves as the foundation for calculating rates of return and assessing a company's capital. A balance sheet is fundamentally a representation of an institution's total financial situation and condition as regards profit and loss over a specific time period.
The correct balance sheet format is similar to that of the trade companies. The liabilities column is on the left, and the assets column is on the right. The balance of the sheet is always as follows:
Liability + Capital/Shareholder's Equity = Assets
Three main buckets, or categories, of value must be accounted for in the equation above:
An asset is everything a corporation owns that has a quantifiable worth, meaning it can be liquidated and converted to cash. They are the assets and resources that the business owns.
Current and non-current assets are two types of assets that can be separated in the correct balance sheet format.
- Current Assets: Cash and cash equivalents, prepaid costs, inventory, marketable securities, and accounts receivable are examples of current assets that a corporation plans to turn into cash within a year.
- Non-current Assets: Non-current assets, such as land, equipment, patents, trademarks, and intellectual property, are long-term investments that a corporation does not intend to turn into cash soon.
A liability is anything owed to a debtor by a firm or organisation. Payroll expenses, rent and utility payments, money owed to suppliers, taxes, debt payments, and bonds payable are all examples of this.
Liabilities, like assets, are divided into two categories in the correct balance sheet format: current and non-current liabilities.
- Current Liabilities: Accounts payable and other accumulated expenses are examples of current liabilities that are due within a year.
- Non-current Liabilities: Non-current obligations aren't expected to be paid back within a year. Leases, payable bonds, and loans are examples of long-term responsibilities.
Shareholders' equity is a term that refers to a company's net value and represents the money that would be left over if all assets were liquidated and all liabilities were paid. The equity of shareholders, whether private or public, belongs to the shareholders.
This formula can be used to represent shareholders' equity in the correct balance sheet format, just as assets must equal liabilities + shareholders' equity.
Assets − Liabilities = Shareholders’ Equity
What Is the Significance of a Balance Sheet?
A company's financial health is represented by its balance sheet. For individuals wishing to invest in that company, it provides a valuable purpose in this regard. Investors scrutinise a company's balance statement to determine how valuable its stock is.
Furthermore, whether dealing with banks or other financial concerns, a balance sheet is an essential document for any organisation. The following is a thorough list of reasons for preparing a balance sheet using the correct balance sheet format:
- Balance sheets can be used to track a company's financial growth and make an official record of it year after year. A comparative balance sheet format can be used to look at the graphical growth of any company over time.
- Banks demand companies to provide their balance sheets when requesting a bank loan to assess a company's financial strength. A balance sheet must be submitted to the bank by either the company or whoever is applying on their behalf.
- Any financial professionals, investors, creditors, and stakeholders evaluate the company's balance sheet before collaborating with or investing in it.
- Stakeholders use the correct balance sheet format to understand the performance and liquidity position of a company or a division of a company. A consolidated balance sheet format is used for a parent firm with affiliates.
- Balance sheets are used by managers to make better judgments about project expansion and to balance unforeseen expenses.
- Any organisation's credit/debts and/or earnings can be reflected on the balance sheet.
Sample Format of a Balance Sheet
The three sections of assets, liabilities, and owner's equity are largely universally accepted in the correct balance sheet format. However, there are two different ways to present the balance sheet format: account and report formats. The account is split into two sections: left and right.
On the left are assets, while on the right are liabilities and owner's equity. This is a fairly common balance sheet layout. The total of the left side is always equal to the total of the right side for a properly produced balance sheet. For balance sheet format, this is also known as the T-shaped or horizontal format.
The report format, conversely, employs a vertical balance sheet format. The assets part is at the top, followed by the liabilities and owner's equity sections.
Steps To Make a Basic Balance Sheet
The basic steps to answer the question, “How to create a balance sheet for your business,” are outlined below. Even if you employ an accounting system or software to automate some or all of the processes, understanding how a balance sheet is generated can allow you to recognise any problems and correct them before they cause long-term damage.
1. Decide On the Reporting Date and Time Frame
In case you’ve been wondering how to create a balance sheet, the first step in the process is to decide upon the time frame and reporting date. A balance sheet is used to show a company's total liabilities, assets, and shareholders' equity as of a specified date, i.e., the reporting date. Frequently, the last day of the reporting period is the reporting date.
The majority of businesses, particularly those that are publicly traded, will report quarterly. The reporting date will almost always fall on the last day of the quarter in this case:
1st Quarter: March 31
2nd Quarter: June 30
3rd Quarter: September 30
4th Quarter: December 31
Organisations that report on an annual basis frequently use December 31 as their reporting date; however, they can use any date they want.
After the reporting period has concluded, it's not uncommon for a balance statement to take a few weeks to prepare.
2. Identify Your Assets
You'll need to count your assets as of that day after you've determined your reporting date and period.
Assets are often listed on a balance sheet in two ways: as individual line items and as total assets. Dividing assets into multiple line items will make it easier for analysts to comprehend what they are and where they came from; ultimate analysis will involve tallying them all together.
Both current and non-current assets should be subtotaled before being summed in the correct balance sheet format.
3. Make A List of Your Liabilities
You'll also need to figure out what your liabilities are. These should be grouped into line items and totals. These should be subtotaled and then summed together, much like assets.
4. Calculate Shareholders’ Equity
If a firm or organisation is owned by a single person, the shareholders' equity will be quite easy. If the company is publicly traded, the computation may get more complicated due to the many forms of stock that have been issued.
The following are examples of line items found in this portion of the correct balance sheet format:
- Common stock
- Preferred stock
- Treasury stock
- Retained earnings
5. Adding Total Liabilities to Total Shareholders’ Equity and Comparing to Assets
Total assets must be compared to total liabilities plus equity to guarantee the balance sheet is balanced. You'll have to add shareholders' equity and liabilities together to do so.
Note: If the balance sheet does not balance, there is most certainly a mistake with some of the accounting data you've used. Check to ensure that all of your entries are proper and accurate. You may have underestimated your totals or omitted or duplicated liabilities, assets, or equity.
6. Compliance with the MCA
MCA Compliance is a collection of rules established by the Ministry of Corporate Affairs that apply to all businesses. Every business must create a profit and loss statement and a balance sheet following the prescribed correct balance sheet format. The following are the line elements that must be included:
- Cash, accounts receivable, and inventory that are examples of current assets
- Equipment, vehicles, and land that are fixed assets
- Goodwill, that is an intangible asset
- Accounts payable, accrued expenses, and taxes, that are all examples of current liabilities
- Long-term debt, that is an example of long-term liability
- Retained earnings and capital stock, that are examples of shareholder’s equity
Taking actions to improve and maintain the correct balance sheet format will help your company prosper even in the most difficult of circumstances. It also lowers the chances of failure.
Business expansion can be costly, but a strong balance sheet will lay the foundation from which you can launch into new markets and products. When it comes to evaluating loan applications, bankers prefer to see a robust balance sheet with healthy cash reserves and a balanced capital structure.
Overall, learning how to create a balance sheet that is healthy will make you more adaptable and provide you with more possibilities for shaping a more successful future.
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Q. What is the best way to tell if a balance sheet is accurate?
Ans. When your calculation displays your total assets equaling your total liabilities plus shareholders' equity, you know your sheet is balanced. If these aren't the same, you'll need to go through all of your numbers again.
Q. What is the purpose of a balance sheet?
Ans. As part of your business plan, you should include your balance sheet. Consider it a glimpse of your company's financial status at a specific time period, such as the end of a month, quarter, or year.
Q. What is the definition of a year-to-date balance sheet?
Ans. Year to date (YTD) refers to the amount of time from the beginning of the current calendar year or fiscal year to the present day. YTD data is important for comparing performance data to competitors or peers in the same industry, as well as analysing business trends over time.
Q. What do you mean by current liabilities?
Ans. Current liabilities are a company's short-term financial commitments due within a year or during a normal operational cycle. Accounts payable, short-term debt, dividends, notes payable, and unpaid income taxes are all examples of current liabilities.
Q. What is the balance sheet's most appealing item?
Ans. The top line, or cash, is considered by many analysts to be the most essential item on a company's balance sheet. Accounts receivable, short-term investments, property, plant, and equipment, and large liability items are among the other critical items.