When it comes to running a company, the most important pieces of information would usually be related to finances; the more a company is able to earn, the higher the chances of it becoming a mainstay within the industry. You may also like printable sheet templates.
So, if a company were to project its financial status towards its investors or just simply understands where it currently is in terms of financial standards, then it’s important that all information that can help in achieving that should be placed in a specific document. This is why it’s important that one learns how to create a balance sheet and this article will teach you how to create one.
Project Balance Sheet of Company
Sample Balance Sheet
Balance Sheet of Family Budget
What is a Balance Sheet?
A balance sheet is a financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity within a specific point in time. These three balance sheet segments give investors an idea as to what the company currently owns or what the company owes. This can also tell them just how many people have invested in the company and how much these people have invested. It’s a very useful document that will help potential investors determine as to whether or not they should put money into a business, and it’s also great for determining whether the business is going to survive or if it looks like it’s not doing well in the industry.
1. Why are Balance Sheets So Important to a Business?
As already mentioned, a balance sheet is a very useful document that will provide a picture of the financial health of a business within a given moment in time, this usually being the end of the month or the end of the year. If you’re the business owner, then the balance sheet example can help you see if your business is gaining more money than it spends, or if it’s owing more money than it can hope to afford. Also, it’ll tell you important information such as the current value of your assets and the overall value of your business.
It’s also a very useful tool that will help you determine if there are any problems in your simple business, giving you more than enough time to figure out what they are and the ways in which you are going to solve them. The balance sheet is a vital financial statement you should definitely review regularly as every transaction that the business makes can change its outcome.
Also, this is a very useful document which can help people determine whether your company is worth investing into or not. If they see in your balance sheet that your business is doing rather well for itself, then there’s a very high chance that you’ll be gaining a lot of potential investors that will be willing to help as they can see that your business makes it to the top of the industry. While this isn’t always the case as there’s a chance that you might be losing more than you’re earning, it’s still best to have a balance sheet that will project the current financial state of your business.
Daily Cash Balance Sheet
Simple Retail Balance Sheet
What Should be on Your Balance Sheet?
As previously mentioned, you have to make sure that all information regarding a company’s assets, liabilities and shareholders’ equity are all on the balance sheet. These 3 components of the document are each comprised of several smaller accounts that break down the specifics of a company’s finances. These accounts vary widely within the industry, and the same terms can have different implications depending on the type of company. However, there are a couple of components that investors will almost always come across through every balance sheet they go through. You may also see personal balance sheet templates.
These are basically all of the things that the business owns. When it comes to writing these down on the balance sheet, they’re ordered from top to bottom based on their liquidity; this means the ease in which these assets can be converted into cash. They are divided into current assets, those which can be converted to cash in one year or less
and those that cannot. You may also like balance sheet templates.
Here is the general order of accounts when it comes to assets:
- Cash and cash equivalents – These would be the most liquidated out of the bunch as this deals directly with actual currency. So, this can be everything from treasury bills, short-term certificates, and hard currency. You may also see excel spreadsheet examples.
- Marketable securities – equity and debt securities for which there is a liquid market
- Accounts receivable – This is basically the amount of money that’s owned by the customers to the company. This may even include an allowance for doubtful accounts as there is a certain portion of customers that are not expected to pay within a given point in time.
- Inventory – These would be all of the available goods within the company that’s to be sold to its customers. The items within a company’s inventory are all valued at the lower of the cost of the market price.
- Prepaid expenses – Companies always have expenses that need to be taken care of, so it’s important to list down all of the already paid expenses into the document. These would be items such as paid insurance, advertising contracts, rent, etc.
You’re also going to need to put in the long-term assets of the company. This should include the following items:
- Long-term investments – These are all the securities that cannot be liquidated within the next year.
- Fixed assets – These are long-term assets that businesses use in order to gain income. So, this includes everything from land, machinery, equipment, buildings and just about anything else that you can classify as a business’s long-term asset. You may also see sample balance sheet templates.
- Intangible assets – When you talk about these types of assets, we’re talking about non-physical, yet highly valuable items that a business owns such as an intellectual property and goodwill; in general, intangible assets are only listed on the balance sheet if they are acquired, rather than if they were made by the company. So, there’s a chance that this particular type of asset can either be understated or overstated. You may also see sheet templates in PDF.
When you think about the word “liabilities”, then what immediately goes to your mind would have to be money that one owes. If we’re talking about a company’s liabilities, then it’s the different amounts of money that a particular company owes to outside parties. This can be anything from the rent that has to be paid for certain facilities, utilities that have to be bought, salaries that have to be given to employees, etc. Current liabilities are those that are due within one year and are arranged in accordance with their due date. Long-term liabilities are payments that are due at any given point in time after a year. You may also see sheet examples.
Here are a couple of examples of current liabilities:
- Loans that a company has taken from a bank or any financial institution.
- Interests that have to be paid that comes with the loans.
- The wages of the employees which have to be paid.
- The rent the company has to pay.
- Taxes that need to be deducted.
- Utilities that have to be purchased.
- Customer prepayments.
Here are examples of long-term liabilities:
- Long-term debt – Long-term debt consists of loans and financial obligations which can last for more than a year. Basically, these are payments that are due after a year’s time. You may also like startup balance sheets.
- Pension fund liability – This is the amount of money that every single company is required to pay into their employee’s retirement funds.
- Deferred tax liability – These are all the taxes that a company has to pay but are not due until the end of the year. This figure reconciles differences between requirements for financial reporting and the way tax is assessed; a good example being the calculation of depreciation.
You must also remember that there are some liabilities that should not appear on the balance sheet. A good example being operating leases.
3. Shareholders’ Equity
Shareholders’ equity is the money attributable to a business’ owners, meaning its shareholders. This is also commonly referred to as “Net Assets” as this is the equivalent of a company’s total assets which is then subtracted by the company’s liabilities; the liabilities being the debt the company owes to non-shareholders. You may also see business balance sheet templates.
Here are the different components that the shareholders’ equity is comprised of:
- Retained earnings – These would have to be all of the net earnings that the company can decide to reinvest into the business or the money can also be used to pay off any debt the company may have with outside parties. The rest of the money is then distributed to the shareholders in the form of dividends. You may also like non-profit sheet templates.
- Treasury stock -This would be the stock that the company has either repurchased or has never issued. These stocks can be sold at a later date to raise the amount of cash that the company can gain or the stock can be used to repel a hostile takeover: the acquisition of a company by another in the hopes of acquiring all of the company’s stocks. You may also see what is a balance sheet.
There are some companies out there who issue preferred stock (a class of ownership in a corporation that has a higher share on certain assets and earnings) which will then listed separately from the common stock (the security that represents one’s ownership of a company) within the shareholder’s equity section of the balance sheet. The “common stock” and “preferred stock” accounts are calculated by multiplying the par value by the number of shares that have been issued. You may also see simple balance sheet templates.
If you would like to learn more on how to create a balance sheet or its particular uses, then you can always go through our site until you’re able to find the articles that have the information you need to help you and your business out. You may also see trial balance sheet templates.