What is a balance sheet and how to make one? (includes structure and example)

A balance sheet (also known as a balance sheet or statement of financial position) is a financial document or report that shows in detail the assets (what you own), the liabilities (what you owe), and the equity (also called net worth) with which a company has at a certain time.

Along with the income statement and cash flow , the balance sheet is one of the three main financial statements that are used to financially analyze a company.

Being specific, the balance sheet allows us to analyze the assets, liabilities and equity that a company has and thus, for example, know how much and in what it has invested, and how much of the money invested comes from creditors and how much comes from capital. own.

The balance sheet allows us to know and analyze the financial situation of a company at a certain time.

In this article you will find:

• What is a balance sheet?
• What is the utility or importance of a balance sheet?
• How to make a general balance?
• Summary

What is a balance sheet?

A balance sheet (also known as a balance sheet or statement of financial position) is a financial document or report that shows in detail the assets (what you own), the liabilities (what you owe), and the equity (also called net worth) with which a company has at a certain time.

Assets are the assets that the company has to carry out its activities. These include:

• the money that is physically in the company (for example, in your safe), and the money that you have deposited in the bank (for example, in your current account).
• the physical elements that the company has to carry out its operations, and that have a permanent or almost permanent duration (for example, buildings, land, machinery, equipment, etc.), or that have a temporary duration (for example, materials premiums, merchandise, etc.).
• the debts that the clients have with the company.

Liabilities are the debts that the company has with creditors. These include:

• the debts that the company has with its suppliers.
• the debts you have pending with banks and other financial entities.

And the heritage is made up of:

• the contributions made by the partners or shareholders of the company.
• the benefits or utilities that the company has obtained.

If the income statement is like a “movie” showing how a company has fared financially over a given period of time, the balance sheet is like a “picture” showing what a company’s financial situation is at one point in time. determined.

Companies prepare their balance sheet generally every year at the end of their fiscal year ( final balance ); although they also usually prepare balances at the beginning of the year ( opening balances ), and balances with a monthly, quarterly or semi-annual frequency ( partial balances ).

Structure and example of a balance sheet

The structure or format of a balance sheet is usually the same in all companies, although the accounts that comprise it usually vary depending on the accounting standards of each country and the company’s line of business.

Assets in one column and liabilities and equity in another are shown in a common structure or format of a balance sheet.

In the left column are listed the assets ordered generally according to their liquidity, starting with those that are more liquid (more easily convertible into cash). For example, cash on hand is the most liquid there is and, therefore, it is in first place.

And in the right column, liabilities and equity are listed, generally ordered according to their enforceability, starting with those that have a greater enforceability. For example, debts with suppliers are usually more callable than capital and, therefore, are placed before it.

On a balance sheet the total value of assets must equal the total value of liabilities plus the total value of equity.

For example, if a company has $ 300,000 in assets and $ 200,000 in liabilities, it will have an equity of $ 100,000; But if, for example, you have $ 300,000 of assets and $ 400,000 of liabilities, you will have a negative equity of $ 100,000, in addition to serious financial problems.

As its name implies, in every balance sheet the column of assets and the column of liabilities and equity are in balance.

The reason that on a balance sheet the total value of assets should equal the total value of liabilities plus the total value of equity is that, in theory, all of a company’s assets are financed either with third-party funds (liabilities) or with own funds (equity).

For example, if a company buys merchandise from a supplier for US $ 1,000 with a 30-day payment term, the purchase increases its assets (specifically its inventories) by US $ 1,000, but also its liabilities (specifically its accounts payable). ) in the same quantity.

And if the company buys the merchandise in cash using contributions from the partners, the purchase also increases its assets (specifically its inventories) by US $ 1,000, but also its assets (specifically its capital) by the same amount.

A common structure and example of a balance sheet is as follows:

Balance sheet model

Note that in the balance sheet example the basic accounting equation is met : total assets ($ 50,100) equals total liabilities and equity ($ 50,100).

Here is the explanation of each of the accounts that make up this balance sheet example:

The current assets or current assets are assets that can easily be converted into cash. This includes the following accounts:

• Cash and banks or available : the money that the company has in its box or deposited in an account in the bank.
• Customers , accounts receivable or trade accounts receivable : the money customers owe the company as a product of sales made on credit.
• Other debtors , other accounts receivable or non-commercial accounts receivable : the money that is owed to the company, but that does not include the balance of the clients.
• Stock or inventory : includes raw materials, products in process, and finished products or merchandise.

The non – current assets or fixed asset is an asset that can be converted into hard cash. This includes the following accounts:

• Property, machinery and equipment : includes buildings, land, machinery, equipment, transport vehicles, furniture, fixtures, etc.
• Accumulated depreciation : the value of the accumulated depreciation of the assets in the previous account, except for land that is not depreciated.

The current liabilities are obligations or debts that the company maturity of less than one year. This includes the following accounts:

• Suppliers , accounts payable or commercial accounts payable : the money the company owes its suppliers as a product of purchases made on credit.
• Other creditors , other accounts payable or non-commercial accounts payable : the money that the company owes to third parties, but that does not include the balance that remains to pay its suppliers.
• Taxes payable or taxes payable : the balance of taxes that the company has to pay.

The non – current liabilities are obligations or debts that the company maturities greater than one year. This comprises the following account:

• Long-term debts: the long-term debts that the company generally has as a result of loans acquired from banks or other financial entities.

Finally, equity or net worth comprises the following accounts:

• Capital or share capital : the contributions made by the partners or shareholders of the company.
• Retained earnings , retained earnings , retained earnings or reserves : the profits are retained or accumulate in the company after paying dividends.
• Profit for the year or results for the year : the profit for the year before being distributed as dividends and destined to retained earnings.

The projected balance sheet

As we have mentioned, the balance sheet shows the assets, liabilities and equity that a company has at a given time; however, it is also possible that a balance sheet shows the assets, liabilities, and equity that a company expects to have at any given time.

In this case, the balance sheet is known as the projected balance sheet since it effectively shows a projection of the assets, liabilities and equity that the company expects to have at a given time, and not the assets, liabilities and equity that you already have.

What is the utility or importance of a balance sheet?

Along with the income statement and cash flow , the balance sheet is one of the three main financial statements that are used to financially analyze a company.

Being specific, the balance sheet allows us to analyze the assets, liabilities and equity that a company has and thus, for example, know how much and in what it has invested, how much of the money invested comes from creditors and how much comes from own capital , how well you are managing your liabilities, and how much your assets amount.

For example, assuming the following balance sheet of the company «Abcde SA» as of December 31, 2018:

Abcde SA
Balance sheet as of December 31, 2018

After analyzing it, some conclusions we could reach are:

• The company has a total investment of US $ 230,000, a short-term investment of US $ 80,000, and a long-term investment of US $ 150,000.
• the largest investment of the company is in the long term, due to the acquisition of property, machinery and equipment (US $ 150,000).
• The total financing of the company is US $ 230,000, which is divided into:
  • Third-party financing: US $ 25,000 in the short term and US $ 10,000 in the long term.
  • Financing with own funds: in the short and long term US $ 195,000.
• more is invested with own capital, especially in the acquisition of goods for use by the company (fixed assets), instead of being used in the acquisition of merchandise for commercialization (current assets).
• it can be seen that no loans have been acquired from the bank or financial entities, which would increase the liability; instead, the profits and the capital contributed have been used for financing.

To carry out a better analysis of a balance sheet, financial ratios are usually used .

Likewise, the balance sheet allows us, when comparing two or more balance sheets from different periods, to analyze how the financial situation of the company has changed and thus, for example, know if it has increased its assets, if it has managed to reduce its debts, by how much your assets have varied and, in general, whether you are meeting your financial goals.

For example, assuming the following balance sheet of the company «Abcde SA» as of December 31, 2018 and December 31, 2017:

Abcde SA
Balance sheet as of December 31, 2018 and 2017

By way of analysis, we could say that the company has increased its assets by US $ 34,000, has managed to manage its liabilities since these have decreased by US $ 470 and, as a consequence, it is on the right track since it has increased its assets in US $ 34 470.

The analysis and comparison of two or more balance sheets from different periods ( horizontal analysis ), usually reveals more information than the analysis of a single balance sheet ( vertical analysis ).

In the case of the projected balance sheet, this allows us to analyze the future assets, future liabilities and future equity that a company will have and thus, for example, know how much and in which it will invest, and how much of the money invested will come from creditors and how much will come from own capital.

How to make a general balance?

The general balance sheet of a company is prepared by the finance or accounting area of ​​the company as a product of accounting (generally, every year at the end of the financial year), or whenever required by the company’s managers, for example, to financially analyze this.

However, making the balance sheet of a company is something that anyone can do as long as they know what the assets, liabilities and equity the company has, and follow these steps:

1. List current assets

The first step is to make a list of current or current assets (assets that can easily be converted into cash) owned by the company, along with the corresponding value of each.

Some common current assets in a company are the money you have in your till or in the bank, the money that customers owe you, raw materials, products in process, and finished products or merchandise.

2. List non-current assets

The following is a list of the non-current or fixed assets (the assets that can hardly be converted into cash) that the company owns, along with the corresponding value of each one.

Some common non-current assets in a business are buildings, land, machinery, equipment, transportation vehicles, furniture and fixtures.

Since non-current assets, with the exception of land, depreciate (decrease in value over time), this part should also include the accumulated depreciation of the company’s non-current assets.

3. List current liabilities

Once the assets have been listed, a list is made of the current liabilities (the obligations or debts that must be paid within a year) that the company has, along with the corresponding value of each one.

Some common current liabilities in a company are the money you owe to your suppliers, the short-term debts you have with banks or other financial entities, and the taxes you have to pay.

4. List non-current liabilities

In this step, a list of the non-current liabilities (the obligations or debts that must be paid in a period of time greater than one year) that the company has, together with the corresponding value of each one is made.

The non-current liabilities of a company are basically made up of the long-term debts that it has with banks or other financial entities.

5. Calculate equity

Once the assets and liabilities that the company has have been listed, its equity is determined, which includes the contributions made by the partners or shareholders and the profits, and whose value must correspond to the total value of the assets less the total value of liabilities.

6. Fill the balance sheet format

Once you have the assets, liabilities and equity that the company has, you proceed to fill out the balance sheet format.

A balance sheet format that you can use to prepare your own is as follows:

(name of the company)
Balance sheet as of (date the Balance takes effect)

First, in the left column, assets are placed in the corresponding accounts, and the total of current assets is calculated, the total of non-current assets (the value of the real estate, machinery and equipment account minus the value of the accumulated depreciation), and total assets (total current assets plus total non-current assets).

And then, in the right column, the liabilities and equity are put in the corresponding accounts, and the total current liabilities, the total non-current liabilities, the total equity, and the total liabilities and equity are calculated ( total current liabilities plus total non-current liabilities plus total equity).

When making a balance sheet, make sure of the following:

• Every balance sheet must have a heading indicating the name of the company, and the date it becomes effective. The usual thing is to put the name of the company first, and under it the title: «Balance sheet as of (date in which it comes into force)»; for example: «Balance sheet as of December 31, 2018».
• Every balance sheet must meet the basic accounting equation: the total assets must equal the total liabilities and equity. In case this does not happen with your balance, you should review your accounts taking into account that, as mentioned above, all assets come from either third-party funds (liabilities) or own funds (equity).

Summary

A balance sheet is a document or financial report that shows in detail the assets, liabilities and equity that a company has at any given time.

Unlike the income statement that shows how a company has done financially during a certain period of time, the balance sheet shows what is the financial situation of a company at a given time.

The balance sheet allows us, in general terms, to know and analyze the financial situation of a company at a given moment and thus, based on said analysis, to be able to make decisions.

Finally, the balance sheet is one of the main financial statements along with the income statement and the cash flow .