Introduction: How to Make a Balance Sheet
Money matters, and my hard work, in addition to my two-year business education, seems enough for me to share some easy methods to help people manage their own money. A balance sheet can review a company’s financial position and it is considered a good gauge of the health of the economy since it shows how much assets are available for payment of liabilities. This point is crucial if you need to buy stock from a startup company and you need to judge whether you can make a profit from it. Therefore, it is important for entrepreneurs as well as graduates who seek positions in business world to learn to make balance sheets (detailed in step 7). You need to know it even you are not a business major student.
Where shall we get started?
Assets = Liabilities + Shareholders' Equity
Above is the most popular accounting formula that everyone, even without training, may have heard of before. These are the most general asset classes in the context of accounting. Firstly, assets are either current or fixed (non-current). Current means that the asset will be consumed within one year. Generally, this includes things like cash, accounts receivable(money owed by customers to another entity),prepaid insurance (a current asset which indicates the cost of the insurance contract-premiums that have been paid in advance). and inventory. Long-term assets (also known as fixed asset) are those that are expected to keep providing benefit for more than one year, such as equipment, buildings and real estate. Secondly, you need to know long-term liabilities include items like debentures, loans, deferred tax liabilities and pension obligations and current liabilities include short term debt, accounts payable, accrued liabilities and other debts. Last but not least, Stockholder’s equity includes common stock (a security that represents ownership in a corporation) and retained earnings ( the portion of net income of a corporation that is retained by the corporation rather than distributed to shareholders as dividends).
About these instructions:
These instructions can be divided into three parts:
1) Find each asset from the left side (screenshot #1) information and compute the total volume (see steps 1-2)
2). Classify liabilities and compute the total volume (see steps 3-4).
3) Classify stockholder’s equity and compute the total volume. Also the amount of total liabilities and total stockholder’s equity (see steps 5-6).
To do a balance sheet you must have some information about the company you choose, such as reputation, competitive advantage, business model. And you can use Excel or a piece of paper to put those data together.
First, write the title of your balance sheet. The first line is the company’s name, second line is “balance sheet” and third line is the end of the corporation’s accounting period (as picture B shows). After that, you need to find assets and add them into four categories in the left side: current asset, long term asset, intangible asset and other asset (picture B). Finally, compute the total amount of each part and plus them together to get the total asset number.
Compute each asset category and add them together.
1. Total current assets=cash+ accounts receivable+ Inventory+ prepaid insurance
2. Total long-term asset =investments+ buildings+ equipment- accumulated depreciation
3. Total intangible assets=goodwill+ patents
Total assets= Total current assets+ Total long-term liabilities+ Total intangible assets
Divide liabilities into current liabilities and long term liabilities. List all current liabilities (accounts payable, wages payable, interest payable, texts payable) and long term liabilities(notes payable, bonds payable) separately in a column.
Compute the total current liabilities and long-term liabilities and add them together.
1.Total current liabilities=accounts payable+ wages payable+ interest payable+ taxes payable
2. Total long-term liabilities=notes payable +bonds payable
Total liabilities= Total current liabilities+ Total long-term liabilities
List all the stockholders’ equity account and compute the total number.
Add Liabilities and Stockholder’s account together to get the amount equal to total assets.
We had done a simple balance sheet. If you have more questions please let me know.
From these information we can tell this company is in a good financial condition because its assets is enough to pay the liabilities. And you can know better about a company. For example, you can calculate the return on asset ratio to find how much a company is earning on its total assets. The ROA ratio (percentage) is calculated as:
Average total assets can be calculated by dividing the year-end total assets of two fiscal periods. A high percentage return implies well-managed assets.