A balance sheet is an important type of document in different fields of business, such as accounting, finance and the like. The first thing that you have to know about balance sheets is that you’ll be dealing with a lot of numbers. You need to be well-versed in knowing your arithmetic in order to properly document a company’s balance statement. Otherwise, you’ll find
yourself in a whole lot of trouble.
This is why companies hire accountants and auditors to make sure they have their figures right. But if you’d like to have a try yourself, or if you need to understand what information you can get from a balance sheet, here is a quick and informal guide on how to prepare a balance sheet in plain, good-old-fashioned English.
Learn about a balance sheet. You don’t need to graduate from a finance course (although it will help) and having a hobby as a tightrope walker won’t help you balance it any better than anyone else so pay attention. A balance sheet is essentially a document that reveals the financial status of a person or a corporation, including assets and liabilities. Whatever it is that an entity owns, it is reflected in this document. This also includes what it owes to other individuals or companies, as well as what anything left over.
Learn the parts of a balance sheet. A balance sheet is basically divided into four main parts which are:
- Equity is the part of the balance sheet that shows the value of assets that an individual or business personally owns.
- Assets refer to the things that an entity owns which they find utility in, or use to make money or to earn. Some concrete examples might include office equipment, investments, supplies and even the building where a business hold office. One asset that the simple layman may understand is cold, hard cash which is used to buy things that the company may need. Or for an individual, it can be one’s home, one’s car, and one’s other valuable holdings.
- Heading is the section that provides basic details, and introduces some concepts or nuances about a particular corporation or business entity. It is the part of the document that tells the reader what kind of financial statement it is, the name of the entity involved and whose balance sheet it is, and for what time period.
- Liabilities are accounts payable that a company owes another individual or company. These are items that have yet to be paid for. Most of the time, liabilities are indicated as “payables”.
The important thing with preparing a balance sheet is that the total value of Assets should be equal to Liabilities plus Equity. Therefore, it is called a “balance” sheet. This is based on the concept that whatever asset you have on hand should either have been paid with your own money, or is still being paid off from borrowed funds.
There are a lot of things to consider when preparing a balance sheet, including which items to list in which column. But most companies are interested in knowing their “net worth,” which is technically what your company will have left after you’ve paid all of your debts. To arrive at this, you use the formula Assets minus Liabilities. What you get here, whether it is a positive or a negative figure, will be what you essentially the entity’s real worth at any given time.