A balance sheet is a summary of your company’s assets, liabilities and owner’s equity at a specific point in time. It’s a snapshot of your business’s financial health and can be used to assess your company’s liquidity, risk, borrowing level and ability to pay dividends. It’s also useful in comparing your company to competitors and reviewing net worth.
The basic equation of a balance sheet is Assets = Liabilities + Owner’s Equity. The first step in creating a balance sheet is to determine the period for which you’re reporting (this is usually a year, quarter or month). After determining your reporting date, you’ll identify all of your company’s resources and sources of capital.
Your assets will appear on the left side of the balance sheet and your company’s debts and obligations will be shown on the right. The order of items on a balance sheet is determined by their convertibility and physical existence, with the most liquid assets appearing first. These include cash, cash equivalents such as the balance in your company’s checking and instant access deposit accounts, petty cash and checks written on your account, marketable securities that can be quickly sold off such as stock and short-term deposits, as well as inventory which includes all of your products available for sale including raw materials and work in progress.
Liabilities are the money you owe to others. They can be either current or noncurrent. Current liabilities include the sum of all accounts payable, notes payable due within one year and the current maturities of long-term debt. Noncurrent liabilities are the sum of all deferred taxes, accrued expenses and any other obligations that will be paid off in the future such as a pension plan or severance costs.
After listing all your company’s assets, liabilities and owner’s equities, you’ll reconcile the totals at the bottom of the balance sheet. The totals on the right should be equal to the sum of the totals on the left side.
If they aren’t, the difference is your company’s net worth. The most common methods for calculating a company’s net worth are based on its balance sheet and income statement.
A more comprehensive method for calculating a company’s net wealth takes into account more than just the balance sheet and income statements, including a variety of ratios and trends that can help to detect problems with your company’s operations and finances.
A few things to remember about a balance sheet is that it only reports the value of your company at a specific point in time and does not reflect future projections of revenue or expense. It also does not include any potential or speculative liabilities that may inure to the company in the future such as lawsuits. Typically, companies will only report these in the footnotes of the balance sheet if it is highly probable that they will be obligated to pay them. For example, a company that is being sued over a product liability claim will likely only report the lawsuit in the footnotes of the balance sheet until it loses the case and must pay a judgement. Bilanz