Hello friends,
How to Prepare a Balance Sheet: If you are a small business owner, you know how important it is to stay on top of your finances. One of the key financial statements that every business owner needs to know is the Balance Sheet.
Don’t panic – it is not as hard as it sounds. In this blog, I will break it down in simply so you can prepare a balance sheet for your small business, even if finance is not your background.
What is a Balance Sheet?
A balance sheet is sort of like a photograph of your business’s financial position at a given point in time. It shows what your business has (assets), what it owes (liabilities), and what is your own investment (owner’s equity).
A balance sheet can be summarized by the following formula:
Assets = Liabilities + Owner’s Equity
So we can say, “A balance sheet is a financial statement of a company showing what the company owns (assets), what it owes (liabilities), and also the owners’ investment in the business (shareholders’ equity) at a specific period in time.”
Why is a Balance Sheet Important?
A balance sheet is one of three main financial statements in assessing a business. A balance sheet summarizes all that a company has and owes on a given date. It is important for the daily operations of a business.
Since the balance sheet captures all transactions from the company’s inception, it indicates the overall financial health of the company. It is also helpful for potential investors, clients, and partners to have a general understanding of whether the company has a solid financial position.
The balance sheet is important because:
- It shows the strength and solid foundation of your business.
- It helps in getting loans or attracting new investors.
- It helps clarify where your money is being spent.
Step-by-Step: How to Prepare a Balance Sheet
- Choose a Date
- List All Your Assets
- List All Your Liabilities
- Calculate Owner’s Equity
- Check the Balance
Step 1: Choose a Date
First, decide the date for which you want to make the balance sheet. Usually, it is made at the end of the financial year (31st March), but you can prepare it monthly or quarterly too.
Step 2: List All Your Assets
Assets are things your business owns. They are divided into
Current Assets (can be converted into cash within a year):
- Cash in hand
- Bank balance
- Stock/inventory
- Accounts receivable (money customers owe you)
- Prepaid expenses
Non-Current (Fixed) Assets (used for long term):
- Land and building
- Machinery
- Furniture
- Vehicles
- Computers, etc.
Write down the value of each asset on the left-hand side of the balance sheet.
Step 3: List All Your Liabilities
Liabilities are things your business owes to others. They include:
Current Liabilities (to be paid within a year):
- Bills payable
- Short-term loans
- Outstanding expenses
- GST payable, etc.
Non-Current Liabilities (long-term):
- Long-term business loans
- Lease obligations
Mention all liabilities on the right-hand side of the balance sheet.
Step 4: Calculate Owner’s Equity
Owner’s equity is your investment in the business. It includes:
- Initial capital
- Profits retained in the business
- Less: Drawings (money taken out for personal use)
You can calculate equity using the formula: Equity = Assets – Liabilities
Step 5: Check the Balance
Now total both sides of the balance sheet. Both sides should be equal. If not, check for any missing item or error.
Example Format of a Simple Balance Sheet
| Assets | Amount (₹) | Liabilities & Equity | Amount (₹) |
| Cash in Hand | 20,000 | Bills Payable | 10,000 |
| Bank Balance | 50,000 | Short-Term Loan | 40,000 |
| Inventory | 30,000 | Owner’s Equity | 70,000 |
| Furniture | 20,000 | ||
| Total Assets | 1,20,000 | Total Liabilities + Equity | 1,20,000 |
Tips for Small Business Owners
- Use Excel or accounting software like Tally or others to make balance sheets easily.
- Keep your bills, receipts, and bank statements properly.
- Review your balance sheet at least once every quarter.
Final Words,
Creating a balance sheet may seem dull at first, but once you grasp the idea, it is a great tool for scaling your business. Start simple and be consistent. You will improve over time at running your business finances.
If you found this useful, feel free to forward it to fellow business owners or friends that are beginning their own business adventures.
Have questions? Drop them in the comments, and I will do my best to help.