If you want to understand your business, there are few financial statements more important than a balance sheet.
Business owners, investors, and lenders use a company’s balance sheet to evaluate the health of a business and make important decisions.
That’s why it’s important to understand the purpose of this document, the information it contains, and how to read it.
What is a balance sheet?
A balance sheet is a financial statement that displays the liabilities, equity, and assets of a business, and thus the organization’s book value.
Essentially, it lists what a company owns, what it owes, and how much the owners or shareholders have invested in it. Along with an income statement and a cash flow statement, a balance sheet helps show the financial health of a company.
A business owner may review a balance sheet to determine whether the company has enough assets to cover its liabilities
Third parties, such as potential investors and financial institutions, may want to review a balance sheet to see what assets a company has on hand and how those assets were financed. This can help clarify if a particular company would be a wise investment.
External auditors may need to see a balance sheet to make sure that all assets are accounted for, properly valued, and presented correctly in the financial statements.
Balance sheet example
Many publicly traded companies post information such as their annual report, income statements, and balance sheets online, where anyone can access them. So if you’ve ever wondered what these statements look like for successful companies in your industry, it’s worth doing some research.
But for a more general idea of what a balance sheet might look like, you can look at Costco’s annual report and financial statements. Notice how they have a detailed balance sheet that lays out categories such as accounts receivable, accounts payable, long-term assets, and more.
It also includes financial details about shareholder equity and both long-term and current liabilities.
While your balance sheet may look very different from Costco’s, it’s still useful to see how large companies present their financial information—even if your business’s balance sheet is much simpler.
Balance sheet equation
Balance sheets can be long documents, but the equation they are based on is easy to understand:
Total liabilities + Total equity = Total assets
Total assets include current assets and non-current assets; total equity includes share capital and retained earnings; total liabilities include current liabilities and non-current liabilities.
Ever wonder why it’s called a balance sheet? It’s because the two sides of the equation must balance by definition: assets always equals liabilities plus equity.
What goes on a balance sheet?
The balance sheet includes several different components, and while the details may vary from company to company and industry to industry, all balance sheets at least list the value of assets, liabilities, and shareholder equity.
Assets
A balance sheet should state the value of all company assets. This includes anything of value the business owns, such as:
- Cash and cash equivalents
- Accounts receivable
- Prepaid expenses
- Inventory
- Short-term investments and marketable securities
- Property, plant, and equipment (PP&E)
- Notes receivable
Many people find it helpful to list assets in order of liquidity, with highly liquid assets like cash presented first and less liquid assets like PP&E presented last.
Liabilities
Liabilities are debts and other sums of money the company owes, including:
- Cash and cash equivalents
- Accounts payable
- Accrued expenses
- Deferred tax liabilities
- Deferred revenues
- Long-term debt
- Lease obligations
Typically, you list liabilities in order of shortest to longest term, with accounts payable listed first and long-term notes and leases presented last.
Shareholder equity
Also known as stockholder equity or owner’s equity, this term describes the value of shareholder investments plus retained earnings.
This amount belongs to the shareholders of a publicly traded company or the business owners and/or investors of a private company. It’s the value that would remain if the business liquidated all assets and paid off all liabilities.
Structure of a balance sheet
Using a balance sheet template streamlines the process of creating a balance sheet so you can easily input and organize all the information.
The header of your balance sheet should show the company name and the ending date of the reporting period—usually the end of the month, quarter, or year.
From there, name the different categories and their total value in the following order:
- List of assets. You can choose how you want to break out your assets on the balance sheet. Most companies show current assets (those you can convert to cash or use within one year) separately from non-current assets (those that can’t be easily converted to cash within one year). However you decide to divide up the categories, make sure you account for every asset.
- Total value of all assets. Add up the value of all assets on a single line for easy reference.
- List of current and long-term liabilities. Be sure to list all debts, both short and long term and the value of each.
- Total value of all liabilities. At the bottom of the liabilities section, show the total liabilities.
- Total value of equity. Include all shareholder equity, including common stock, retained earnings, owner’s capital accounts, and draws or distributions. Then present the total value of all equity accounts.
- The value of liabilities + equity. One last bit of arithmetic: add the value of your total liabilities to the amount you listed for equity and give this amount its own line in the statement.
If the value of the total liabilities plus equity is the same as the total value of the assets, the balance sheet is balanced. If the two numbers are different, then there is an error somewhere. You need to find and correct that error to ensure your balance sheet is in balance.
Who creates a balance sheet?
For small private businesses, a bookkeeper or even the business owner can handle this task.
Medium-sized private companies will probably need an external accountant to manage balance sheet preparation.
Publicly traded companies typically have large internal accounting teams, including a Controller and CFO, to prepare the financial statements. They also hire certified public accountants (CPAs) to conduct an external audit. This allows for greater accuracy and accountability.
Possible limitations
While a balance sheet can give a great deal of insight into the financial health of your organization, it can’t reveal everything. It’s only a snapshot of business finances at a particular point in time—it doesn’t show your business growth (or stagnation) or the value of your brand reputation, customer loyalty, or experienced workforce. It only shows the book value of business assets, liabilities, and equity.
Looking at other financial statements, like an income statement and a cash flow statement, along with your balance sheet gives you a better understanding of the results of operations and cash flows.
Despite these limitations, a balance sheet is still incredibly useful, and it’s worth creating one so potential investors, lenders, and other stakeholders can see what the organization has to offer.
Simplify financial reporting
Anyone who needs a snapshot of your debts and assets—whether that’s internal decision-makers, potential investors, or financial institutions—can benefit from looking at your balance sheet. It shows what your business owes and what it owns in one easy-to-understand document.
The easiest way to track your organization’s financial transactions is to use an expense management platform that integrates with your accounting software.
BILL Spend & Expense gives you real-time visibility and customizable control over your business finances, so all you have to do is review and approve.
Learn how BILL’s expense management software can organize your financial data by signing up today or requesting a demo.
