make a balance sheet
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A balance sheet is a financial statement that communicates the so-called “book value” of an organization, as calculated by subtracting all of the company’s liabilities and shareholder equity from its total assets.
A balance sheet offers internal and external analysts a snapshot of how a company is currently performing, how it performed in the past, and how it expects to perform in the immediate future. This makes balance sheets an essential tool for individual and institutional investors, as well as key stakeholders within an organization and any outside regulators.
Most balance sheets are arranged according to this equation:
Assets = Liabilities + Shareholders’ Equity
The equation above includes three broad buckets, or categories, of value which must be accounted for:
1. Assets
An asset is anything a company owns which holds some amount of quantifiable value, meaning that it could be liquidated and turned to cash. They are the goods and resources owned by the company.
Assets can be further broken down into current assets and non-current assets.
Current assets are typically what a company expects to convert into cash within a year’s time, such as cash and cash equivalents, prepaid expenses, inventory, marketable securities, and accounts receivable.
Non-current assets are long-term investments that a company does not expect to convert into cash in the short term, such as land, equipment, patents, trademarks, and intellectual property.
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2. Liabilities
A liability is anything a company or organization owes to a debtor. This may refer to payroll expenses, rent and utility payments, debt payments, money owed to suppliers, taxes, or bonds payable.
As with assets, liabilities can be classified as either current liabilities or non-current liabilities.
Current liabilities are typically those due within one year, which may include accounts payable and other accrued expenses.
Non-current liabilities are typically those that a company doesn’t expect to repay within one year. They are usually long-term obligations, such as leases, bonds payable, or loans.
3. Shareholders’ Equity
Shareholders’ equity refers generally to the net worth of a company, and reflects the amount of money that would be left over if all assets were sold and liabilities paid. Shareholders’ equity belongs to the shareholders, whether they be private or public owners.
Just as assets must equal liabilities plus shareholders’ equity, shareholders’ equity can be depicted by this equation:
Shareholders’ Equity = Assets - Liabilities
DOES A BALANCE SHEET ALWAYS BALANCE?
A balance sheet should always balance. The name itself comes from the fact that a company’s assets will equal its liabilities plus any shareholders’ equity that has been issued. If you find that your balance sheet is not truly balancing, it may be caused by one of these culprits:
Incomplete or misplaced data
Incorrectly entered transactions
Errors in currency exchange rates
Errors in inventory
Miscalculated equity calculations
Miscalculated loan amortization or depreciation
HOW TO PREPARE A BASIC BALANCE SHEET
Here are the steps you can follow to create a basic balance sheet for your organization. Even if some or all of the process is automated through the use of an accounting system or software, understanding how a balance sheet is prepared will enable you to spot potential errors so that they can be resolved before they cause lasting damage.
1. Determine the Reporting Date and Period
A balance sheet is meant to depict the total assets, liabilities, and shareholders’ equity of a company on a specific date, typically referred to as the reporting date. Often, the reporting date will be the final day of the reporting period.
Most companies, especially publicly traded ones, will report on a quarterly basis. When this is the case, the reporting date will most usually fall on the final day of the quarter: