A woman business professional is seated at a table with a laptop, some financial papers, and a calculator. She is reviewing financial information and compiling her business's balance sheet.
Keeping an accurate balance sheet lets you visualize your business's worth and expenses at any given time. It's also necessary if you seek funding from banks or investors. — Getty Images/Inside Creative House

A balance sheet is crucial to understanding your business's financial health. Having a clear picture of small business accounting components like assets, liabilities, and equity can help you make data-driven decisions to improve performance. This guide defines each element of the document so you know exactly what to include and how to include it.

What is a balance sheet?

A balance sheet summarizes the financial components of a company — your assets, liabilities, and equity. Think of a balance sheet as a snapshot of a company's financial position at any given time. This snapshot includes what the company owns (its assets) and owes (its liabilities), as well as its capital. It outlines each component by breaking them down into categories, like current and fixed values, or short-term and long-term payments, to calculate the totals.

If you know your liabilities and equity, then you know your assets, because Assets = Liabilities + Equity. This equation ensures that a company's resources are equal to its funding sources. And once you know all three components, you can compare them. Comparing the assets with the liabilities helps you understand your capital, or how much your business is currently worth. Continually reviewing this information is crucial to succeeding in business.


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Why you need a balance sheet

Financial stability is a priority for any business owner. Your balance sheet ultimately tells you how your business is performing and where you might need to make changes.

Your balance sheet is also necessary when applying for credit or loans. You'll likely have to provide the document to lenders so they can decide whether you qualify. Additionally, depending on the nature of your business, other individuals involved in your business, like investors, suppliers, and even customers, might seek access to the information.

[Read more: Creating a Financial Accounting Report With the Four Basic Statements]

Your balance sheet ultimately tells you how your business is performing and where you might need to make changes.

Components of a balance sheet

As stated above, balance sheets consist of two sides (assets and liabilities) that help you define the equity in your business. Here's how to break down these three components.

Assets

Assets include a total of what your business owns. There are three parts to this section: current assets, fixed assets, and other assets.

Current assets

Current assets are resources that a company expects to convert to cash within one year or one operating cycle. Examples include:

  • Cash and cash equivalents: Physical currency, bank deposits, and highly liquid investments.
  • Accounts receivable: Money owed to the company.
  • Inventory: Products held for sale.
  • Prepaid expenses: Costs paid in advance, such as rent and insurance.
  • Short-term investments: Securities that can be easily converted to cash.

Fixed assets

Fixed assets are long-term assets with a useful life of more than one year. These assets are used in the company's operations to generate revenue. Examples include:

  • Land and buildings: Large assets of land and structures such as factories, offices, and warehouses.
  • Equipment: Machinery, tools, and other equipment used in production.
  • Vehicles: Cars, trucks, and any other vehicle used for business purposes.

Other assets

This is a miscellaneous category for assets that don't fit neatly in the other asset boxes. Some common examples include:

  • Intangible assets: Nonphysical items such as patents, copyrights, trademarks, and goodwill.
  • Long-term investments: Investments in other companies that are not intended to be sold in the near future.
  • Deferred tax assets: Future tax benefits that a company expects to realize.

Liabilities

Liabilities include a total of what your business owes, and these can be broken into two parts: current liabilities and long-term liabilities.

Current liabilities

Similar in concept to current assets, current liabilities are short-term debts due within a year. Examples include:

  • Accounts payable: Money owed to suppliers for goods or services received.
  • Accrued expenses: Expenses incurred but not yet paid, such as wages, taxes, and interest.
  • Short-term notes payable: Loans that must be repaid within a year.
  • Current portion of long-term debt: The portion of long-term debt due within the next year.

Long-term liabilities

Long-term liabilities are debts that a company expects to pay over a period longer than one year. Examples include:

  • Long-term notes payable: Loans that must be repaid over several years.
  • Bonds payable: Debt securities issued by a company to raise capital.
  • Lease obligations: Obligations to make lease payments over a period of time.
  • Deferred tax liabilities: Future tax liabilities that the business expects to incur.

Equity

Essentially, your business's equity is its net worth, or how much your company is worth should all its assets be sold and liabilities paid. This total is reached by subtracting what you owe from what you own (Assets - Liabilities).

How to create a balance sheet

Creating a balance sheet can be a straightforward process with the right tools and an understanding of financial principles. Here are the main steps you should take to create a balance sheet.

Choose your software and customize the heading.

Invest in accounting software to streamline the process, or simply use a spreadsheet like Excel. Then, clearly label your balance sheet with your company's name and the time period it covers.

Structure your balance sheet.

List your current and noncurrent assets, as well as your liabilities (both current and long term). Don't forget to include your owner's equity, which includes retained earnings and other equity accounts.

Input the financial data.

Record the values for each asset, liability, and equity account. Ensure that the total assets equal the total liabilities plus the owner's equity. Remember the equation stated earlier: Assets = Liabilities + Equity.

Review and verify the data.

Double-check all figures for accuracy, and ensure the balance sheet adheres to accounting principles. If you're unsure about any aspect of creating your balance sheet, consult with an accountant.

Once you've built your initial balance sheet, update it periodically to reflect changes in your business's financial position. Doing so provides valuable insights into your business's financial health over time.

[Read more: 6 Accounting Tasks That Should Be Done Quarterly]

Accounting tools for creating a balance sheet

Creating a balance sheet can be a time-consuming task, but the right accounting tools can simplify the process. These tools help you organize your financial data, generate accurate reports, and maintain a clear picture of your business's financial health. Here are some popular options:

  • Free online accounting software (Wave, Zoho Books): These user-friendly platforms offer basic accounting features, perfect for small businesses just starting out.
  • Spreadsheet software (Microsoft Excel, Google Sheets): While they are versatile, spreadsheet software requires more manual input and can be less efficient for complex financial tasks.
  • Paid accounting software (QuickBooks Online, Xero): These comprehensive tools are ideal for businesses that need advanced features.

[Read more: App-based Employee Expense Tools for Small Businesses]

This article was originally written by Sean Peek.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

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