How to Prepare a Balance Sheet
The “Balance Sheet”, also known as “Statement of Financial Position”, shows a company’s financial condition as of a certain date.
Financial condition is presented by reporting how much assets the company owns, how much liabilities it owes to others, and its equity or capital (assets minus liabilities).
In this tutorial, we will continue the illustration from previous lessons and prepare a balance sheet.
Like the other financial statements we have prepared, we will use this adjusted trial balance: Adjusted Trial Balance. If you want, you may take a look at a balance sheet example here before we proceed with the steps on how to prepare it.
If everything’s good, let’s begin.
Also Read:
Step 1: Gather the needed information
Like in any other financial statement, we need to gather information to be used in preparing a balance sheet. Any source that shows updated account balances can be used. The most appropriate tool for this, however, would be the adjusted trial balance.
Gray Electronic Repair Services | ||||
Adjusted Trial Balance | ||||
December 31, 2016 | ||||
Account Title | Debit | Credit | ||
Cash | $ 7,480.00 | |||
Accounts Receivable | 3,700.00 | |||
Service Supplies | 600.00 | |||
Furniture and Fixtures | 3,000.00 | |||
Service Equipment | 16,000.00 | |||
Accumulated Depreciation | $ 720.00 | |||
Accounts Payable | 9,000.00 | |||
Utilities Payable | 1,800.00 | |||
Loans Payable | 12,000.00 | |||
Mr. Gray, Capital | 13,200.00 | |||
Mr. Gray, Drawing | 7,000.00 | |||
Service Revenue | 9,850.00 | |||
Rent Expense | 1,500.00 | |||
Salaries Expense | 3,500.00 | |||
Taxes and Licenses | 370.00 | |||
Utilities Expense | 1,800.00 | |||
Service Supplies Expense | 900.00 | |||
Depreciation Expense | 720.00 | |||
Totals | $ 46,570.00 | $ 46,570.00 |
Step 2: Prepare the heading
The first line contains the name of the company. The second line shows the title of the report. We can use either “Balance Sheet” or “Statement of Financial Position”. The third line indicates the date of the report.
The income statement, statement of changes in equity, and statement of cash flows use For the Year Ended, For the Month Ended, For the Quarter Ended, etc. However, we cannot use any of those phrases in a balance sheet since we are not reporting information for a period of time, but rather, information as of a certain date.
Therefore, we shall use “As of…”. Though, some balance sheets omit the phrase.
Gray Electronic Repair Services | |||
Balance Sheet | |||
As of December 31, 2016 | |||
Step 3: Report all company assets
From the trial balance, we take all assets and report them in the balance sheet. Current assets are reported separately from non-current assets. After which, we will compute for the total current assets, the total non-current assets, and the total assets. A single line is drawn every time a mathematical operation is made. The amount of total assets is double-ruled.
Gray Electronic Repair Services | ||||
Balance Sheet | ||||
As of December 31, 2016 | ||||
ASSETS | ||||
Current Assets: | ||||
Cash | $ 7,480 | |||
Accounts Receivable | 3,700 | |||
Service Supplies | 600 | |||
Total Current Assets | 11,780 | |||
Non-Current Assets: | ||||
Furniture and Fixtures | $ 3,000 | |||
Service Equipment | 16,000 | |||
Less: Accumulated Depreciation | 720 | |||
Total Non-Current Assets | 18,280 | |||
TOTAL ASSETS | $ 30,060 |
Note: The above step requires you to be familiar with assets accounts. The next steps will require knowledge of liability and capital accounts. If you need a review of different accounts, you may visit this lesson: Elements of Accounting.
Step 4: Report all liabilities
After the “assets” portion, we will now present “liabilities and capital”. We will start by presenting current liabilities, followed by non-current liabilities. After that, we will take the totals of each as well as the amount of total liabilities – just like what we did for assets.
Gray Electronic Repair Services | ||||
Balance Sheet | ||||
As of December 31, 2016 | ||||
ASSETS | ||||
Current Assets: | ||||
Cash | $ 7,480 | |||
Accounts Receivable | 3,700 | |||
Service Supplies | 600 | |||
Total Current Assets | 11,780 | |||
Non-Current Assets: | ||||
Furniture and Fixtures | $ 3,000 | |||
Service Equipment | 16,000 | |||
Less: Accumulated Depreciation | 720 | |||
Total Non-Current Assets | 18,280 | |||
TOTAL ASSETS | $ 30,060 | |||
LIABILITIES AND CAPITAL | ||||
Current Liabilities: | ||||
Accounts Payable | 9,000 | |||
Utilities Payable | 1,800 | |||
Total Current Liabilities | 10,800 | |||
Non-Current Liabilities: | ||||
Loans Payable | 12,000 | |||
Total Non-Current Liabilities | 12,000 | |||
Total Liabilities | 20,800 |
Step 5: Report the ending balance of capital
The trial balance above does not show the ending balance of capital. The ending balance of capital can be taken from the Statement of Changes in Equity. If you have been following our tutorials, we prepared it before preparing this balance sheet. In any case, any source may be used as long as it gives you the ending balance of capital.
After including capital, we will take the total amount of “liabilities and capital”. That amount is double-ruled.
Gray Electronic Repair Services | ||||
Balance Sheet | ||||
As of December 31, 2016 | ||||
ASSETS | ||||
Current Assets: | ||||
Cash | $ 7,480 | |||
Accounts Receivable | 3,700 | |||
Service Supplies | 600 | |||
Total Current Assets | 11,780 | |||
Non-Current Assets: | ||||
Furniture and Fixtures | $ 3,000 | |||
Service Equipment | 16,000 | |||
Less: Accumulated Depreciation | 720 | |||
Total Non-Current Assets | 18,280 | |||
TOTAL ASSETS | $ 30,060 | |||
LIABILITIES AND CAPITAL | ||||
Current Liabilities: | ||||
Accounts Payable | 9,000 | |||
Utilities Payable | 1,800 | |||
Total Current Liabilities | 10,800 | |||
Non-Current Liabilities: | ||||
Loans Payable | 12,000 | |||
Total Non-Current Liabilities | 12,000 | |||
Total Liabilities | 22,800 | |||
Gray, Capital – ending | 7,260 | |||
TOTAL LIABILITIES AND CAPITAL | $ 30,060 |
Total assets should be equal to total liabilities and capital. If they are not, then something must have gone wrong during the process.
There you have it. The balance sheet we have just prepared is for a sole proprietorship business. In a partnership, several capital accounts will have to be presented – one for each partner. In a corporation, the capital portion is known as stockholders’ equity and is made up of capital stock, reserves, and retained earnings.