How to Prepare a Balance Sheet

Balance sheet, otherwise known as statement of financial position, is a quantitative expression of the assets, liabilities and owner’s equity or net worth of an entity.

 

As the summary of what an organization owes and owns, it is the reflection of how healthy a business is at every particular time.

 

Balance sheet could be prepared monthly, quarterly, half yearly or annually.

 

As a matter of fact, balance sheet represents such tool which can easily be used in evaluating an entity’s flexibility and liquidity level.

 

Balance sheet is the expression of how the resources being controlled or utilized by a business organization are being financed by liabilities (debt) or equity.

 

Balance sheet is reputed for showing the ending balances in an organizational asset, liability and equity accounts at the reporting date. Again, it is used for ratio analysis purposes.

 

Here are the procedural steps to prepare balance sheet:

 

Carefully Study Fundamental Equation:

 

Always have it at the back of your mind that in balance sheet, the aggregate sum of an entity’s assets equals the estimates of the entity’s liabilities plus owner’s equity.

 

That is: Assets = Liabilities + Owner’s Equity. Having got this, it becomes easier to deduce and manipulate the equation to arrive at your desired question.

 

For instance, Owner’s Equity = assets – Liabilities.

 

Calculate Assets

 

What makes an entity thick financially is the value and quantity of assets, investments and products it can easily convert to cash.

 

Ideally, every successful company must be able to make the worth of its assets double its liabilities.

 

By doing so, it adds value in the organization’s equity or stock and even creates better opportunities for financing purposes.

 

It is stipulated that assets should be arranged in order of the rate by which they can easily turned to cash. Such as:

  • Current Assets:
  • Cash at hand
  • Cash in bank
  • Securities like investment, stock, bonds, etc
  • Account receivable or Debtors
  • Inventory
  • Prepayments
  • Non-Current Assets:
  • Property, plant and equipment
  • Intangible assets such as intellectual property(patents, trademarks, Copyrights etc)
  • Goodwill

 

Determining Liabilities

 

It is noteworthy to state that as far as that equation is concerned. Liabilities are minus.

 

These include payable operational costs, debts, and materials expenses.

 

Indeed, lower liabilities imply greater value the entity equity tends to be. Again, current liabilities comprises of cash spent and all other debts which is due for payment under 12 months or within an accounting period of a company.

 

Current Liabilities

  • Trade and other payables
  • Accrued expenses
  • Liabilities held for sale
  • Current portion of loans payable
  • Other financial liabilities
  • Current tax liabilities

 

 

  • Non- Current Liabilities:
  • Deferred tax liabilities
  • Loans payable
  • Other non-current liabilities

 

Equity Valuation

 

The formula is: Owner’s Equity = Assets – Liabilities.

 

In other words, the value of your assets deducted from your liabilities will give a company the estimates of its capital.

 

It is not a good omen for the equation to results in negative net worth, particularly for a growing entity.

Obviously, securing finance could be very hard if not impossible and a company may be experiencing instability.

 

Where the equation results in positive equity, it opens room for the company to obtain additional fund via the sales of stocks, equity and dividends.

 

  • Equity comprises of:
  • Opening balance equity- This is the outlay capital
  • Capital stock- These are ordinary and preference stock
  • Dividend Paid- profits distributed to the shareholders
  • Drawings- owners’ personal withdrawals (common in partnership and sole trader business).
  • Retained earnings- portion of earnings retained in the company.

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In the final analysis, Balance sheet is one of the vital tools by which investors and other stakeholders gain insight into an organization and its operations.

 

It is sheet is essential for giving prospective users the clips of the financial position of a company at glance. Hence, it is suggested that individual stakeholders or group should understand the best use of this document in question.

 

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