What is a balance sheet?
A balance sheet is a financial statement that shows a company’s assets, liabilities, and shareholder equity at a specific point in time. The balance sheet provides the answers to three basic questions:
- What does the company own?
- What does it owe?
- Who are its owners?
Financial statements are often prepared for one year or less but balance sheets can be prepared for any time period.
The balance sheet is the mirror image of a company’s assets and liabilities. It lists assets on one side and liabilities and equity (owners’ investment) on the other. It shows what an entity owns at a certain point in time; it reflects what that entity had to spend or sell as well to acquire those assets.
Why are balance sheets important?
One of the most important pieces of information that balance sheets provide is how much money a company or organization has available at any given point in time, which are its working capital and debts.
They give an indication as to whether a company is financially solvent – meaning a company is able to pay its debts because its assets are greater than its liabilities.
They are also used by lenders in deciding what interest rate they will charge for loans or how much collateral they require in order to offer credit facilities. Balance sheet data must be audited before it can be acted on – either for lending purposes or in order to balance the books of a company.
How do you make a balance sheet?
Reminder: A balance sheet is a financial statement that shows a company’s assets, liabilities, and shareholder equity at a specific point in time. So, the first step in creating one is determining the specific date and time period you want it to reflect.
The second step is totaling the number of assets a company owns – both current and non-current.
The third step is identifying your company’s liabilities – both current and non-current.
The fourth step is calculating shareholder’s equity. For privately held companies with one or two owners, this is pretty straightforward but for publicly traded companies this gets more complicated.
The final step in making a balance sheet is to add shareholders’ equity to your total liabilities, then compare that number to your total assets.
Balance sheets can’t be made without accurate financial records, so you won’t have an understanding of your company’s financial standing if your books are out of whack.
If any of this seems overwhelming to you – don’t stress – you’re not in the minority. Most business owners are not experts at bookkeeping, especially when it comes to creating their balance sheets. So if you aren’t confident in the reliability of your financial systems or the accuracy of your balance sheet, it’s okay. There are people and organizations who can help you improve your financial processes.
At Still Water Financial Operations, we exist to serve small business owners as their outsourced bookkeepers and fractional CFOs so they can focus on what matters most – growing their business. Our team of professional bookkeepers would be glad to connect with you to learn about the challenges in your financial processes and suggest some ways we could help.
To schedule a call with a financial professional from our team, fill out this form. We’ll be in touch very soon.