Running a business is never easy. And if you are a business owner, you will agree that creating a balance sheet is prudent. This financial statement is the heart of a business. While some make monthly balance sheets, others go for quarterly ones based on how frequently they have the reports ready.
A simple balance sheet template will have a few critical components, such as net worth, liabilities, and total assets. With the help of a balance sheet, you will be able to take a quick look at the positioning of your business and can also be helpful to your stakeholders, investors, and lenders.
If you are new to balance sheets and want to know what a balance sheet template looks like, this guide will be helpful to you. We have created a thorough guide that explains what a balance sheet is, how it needs to be prepared, and of course, we will give you a detailed insight about the components in a balance sheet.
What is a Balance Sheet?
Simply put, a balance sheet is a financial document required by a business to analyze its performance. The balance sheet can help a business compare its past and current performance and determine whether they are moving in the right direction, set new goals to reach greater heights, etc. Balance sheets are helpful not only for businesses but also for investors, partners, and stakeholders.
There will be three sections in a balance sheet: assets, liability, and equity. The balance sheet will be for a specific duration, highlighting these three things. So, whatever duration you choose, the assets, liability, and equity will be for that particular duration only.
In a typical balance sheet, the equation will be arranged like this:
Assets = Liabilities + Stakeholders’ Equity
What are the Essential Parts of a Balance Sheet?
As said, there are three essential parts to a balance sheet-assets, liability, and equity. Now, let's explain what each part is and will have:
Assets are resources that a business owns. Assets will usually have good value in the future. There will be three kinds of assets mentioned in a balance sheet- current, long-term, and other.
Current assets are primarily those that a business intends to convert into cash within one year. These assets can be:
Inventory: Inventory can be raw materials and finished goods.
Cash or cash equivalents: Money that an organization has secured in a bank in savings bonds, deposit certificates, or cash.
Prepaid expenses: The amount for something that is already paid in advance.
Accounts receivable: For example, a business has yet to receive money from a vendor or client for services or goods. Or, a business might have completed a project but is yet to receive the project completion payment from a customer or client.
Short-term investments: They can be securities, which one can convert into cash or sell out within a short period, for example, within two or three months.
Unlike short-term assets, which one intends to convert into cash within a year, long-term assets are not meant to convert within a year; instead, these assets will get converted into cash after multiple years.
Some examples of long-term assets are:
Long-term investments: Probably, a business has invested in bonds or stocks and plans to keep it on hold for one year.
Property Costs: Properties are tangible assets, and they can be buildings or lands owned by an organization or company.
Equipment Cost: Some companies will also invest in equipment, which is another form of tangible asset. A few examples can be vehicles bought by the company for official use, fixtures, machinery, etc.
Intangible Assets: There are intangible assets as well, which will be non-physical in nature. So these can be copyrights, broadcasting rights, trademarks, patents, etc.
The third type of asset is other assets. They are neither current nor long-term assets. Some examples of other assets are:
Deferred Tax Income: Whatever difference a company gets from the total tax expenses and the payable income tax is called the deferred tax income.
Bond Issue Cost: There will be some professional and registration fees, which fall under bond issue cost.
Prepaid Pension Cost: If there is overfunding or underfunding of pension funds, it will come under the prepaid pension cost.
Other Assets: Any other assets that don't come under current or long-term assets will be included in the other assets' category.
Anything that a company owns to the debtor or an outside party comes under liabilities. Liabilities can be categorized into two parts as well, such as current and long-term liabilities.
Current liabilities will be anything an organization needs to pay within the current year. They can be:
Short-Term Debts: Any debt the company needs to pay within a year specified on the balance sheet will be short-term debts.
Wages Payable: If employee wages are not paid for the specific duration mentioned on the balance sheet, will be wages payable.
Dividends Payable: Any dividends that have been declared but haven't been paid yet to the stakeholders.
Accounts Payable: Any amount that needs to be paid to the creditors, probably within 90 days.
Income Tax Payable: Tax that needs to be paid to the federal or state government within one year.
Any amount that doesn't need to be paid within one year from the date mentioned on the balance sheet.
There are two types of long-term liabilities:
Long-Term Debts: Debts or mortgages that a business doesn't need to pay within one year from the date mentioned on the balance sheet.
Capital Lease Obligations: Any obligations or debts concerning the capital lease that one doesn't need to pay within one year from the date mentioned on the balance sheet.
Equity is the final component of a balance sheet. Equity gives you a clear picture of the net worth of your company. Whatever amount is left out after paying for the liabilities and selling out the assets will be the company's net worth.
So, the formula for this will be:
Total Equity = Total Assets - Total Liabilities
How to Create a Simple Balance Sheet?
If you find a simple balance sheet template for small businesses, creating a balance sheet won't be as difficult as you think. Here are the step-by-step instructions you need to follow to create the balance sheet.
Step 1: Company Name
At the beginning of the balance sheet, you will see a section where you need to add the company's name. Just below that, you need to enter the date when you will create the balance sheet.
Step 2: Assets
Now comes the assets part. Please note that all the components will be a comparison over two years. So, you need to enter the asset details for the prior and the current year. Assets will have multiple sub-sections, for example, cash, accounts receivable, prepaid expenses, etc.; you need to enter the details for each. You will have to calculate the total current assets and write it. Under it will be other assets, which you can modify per your usage. Lastly, you need to enter the total assets amount, which will be the addition of current, long-term, and other assets.
Step 3: Liabilities
Next, come down to the liabilities section. Just like the assets section, you will see multiple sub-section as well. You can modify this part as per current and long-term liabilities. Under the current liabilities section, mention all the current liabilities, and in the total current liabilities section, add them all and mention it. Below that will be the long-term assets section, write the value of the long-term assets here and finally, do the calculation of all and write in the total liabilities section.
Step 4: Equity
You need to write down investment capital and retained earnings in this section. Mention the total equity amount here and below the total liabilities and shareholder equity.
Now you know what a balance sheet template for small businesses is and how it needs to be filled. Do get all the details in one place before creating the balance sheet. Once done, you will get to know the performance of your business.