What is the balance sheet?

The balance sheet measures a company’s financial position on a specific day, typically the last day of a quarter or year. It subtracts liabilities from assets to determine how much shareholder equity is left, a formula known as the “accounting equation.” The difference in that equation may also be called owner’s equity or retained earnings.  

The balance sheet includes current and long-term assets, liabilities, and long-term liabilities (long-term debt). Each category has its own section to facilitate the use of business ratios. For instance, the quick and current financial ratios used to measure liquidity use current assets and current liabilities as variables.

The accuracy of the balance sheet can be checked using balance sheet reconciliation, a process that doublechecks the line items under total assets and liabilities. Examples on the asset side are cash, accounts receivable, prepaid expenses, fixed assets, and inventory. Liabilities include accounts payable, loans, equity accounts, and accrued liabilities.

Who uses the balance sheet?

A balance sheet is a bookkeeping and accounting tool used by investors, lenders, business owners, company directors, executives, tax regulators, and financial analysts. Your balance sheet provides a snapshot of the company’s financial position and assets, and a glimpse into the total net worth of an existing business.

Completed balance sheets can calculate short-term liquidity needs, assess the value of tangible and intangible assets, and measure whether you can afford to pay your total liabilities. It can even show you depreciation numbers on property and equipment. These values can help with financial planning, including income tax planning.

How does the balance sheet relate to the 3-statement model?

The 3-statement model uses a balance sheet, a profit and loss statement (income statement), and a cash flow statement. The three documents are connected. The income statement's bottom line carries over to the balance sheet and cash flow statement, and the cash balance on the balance sheet comes from the cash flow statement.

Some companies use the 3-statement model to create interim financial statements between reporting periods. This becomes necessary when a business’s financial position is precarious or an opportunity arises to expand the company. Those are both scenarios where the availability of working capital is critical. Interim reports can help you measure your liquidity.

The 3-statement model is also useful for creating pro forma financial statements. For example, a pro forma income and cash flow statement with projected numbers can create a sample balance sheet for a hypothetical scenario. This exercise can be a good way to plan a move to a new location, an expansion of a current facility, or downsizing/automating a workforce.

Balance sheet format

Here’s what’s generally included in a balance sheet: 

Assets

The assets on your balance sheet are resources with a monetary value. That value could be instantly accessible, like cash in a bank account or something that will provide a future benefit, like rental properties or inventory. Marketable securities (investments) also fall in the asset category. Start your balance sheet by listing your assets under the following subcategories:

• Current assets: Your current assets are your most liquid assets. You’ll want to list cash, cash equivalents, marketable securities, inventory that can be sold within a year, prepaid liabilities, and accounts receivable due within twelve months.
• Non-current assets: These are also known as long-term assets. They are assets that cannot be converted to cash within one year, making them more illiquid than current assets. Examples include land, buildings, vehicles, natural resources, and long-term bonds.  

Liabilities

Liabilities are the opposite of assets. They are debts listed on the balance sheet's right side. This makes it easier to apply the accounting equation to determine how much equity shareholders have in your company. Liabilities are counted as current if they are owed within one year and long-term if they’re not due for more than a year. Here are some examples:  

• Current liabilities: The current liabilities that normally appear on a balance sheet include accounts payable, accrued expenses, income taxes, payroll and payroll taxes due, utilities, and rents or leases. You might also see short-term notes payable or interest payable.
• Non-current liabilities: Long-term loans and deferred tax liabilities are two common examples of non-current liabilities, also called long-term liabilities. They are essentially debts that will not be paid within one year. Long-term leases fall in this category.

Shareholders' equity

Shareholder equity, calculated on a business balance sheet, represents the company's net worth. You can find yours by subtracting total liabilities from total assets.

How to fill out a balance sheet

1. Determine the reporting period

The balance sheet measures a company’s financial position on a specific day, typically the last day of a quarter or year, but you can also prepare an interim report covering a different time period. Determine your reporting period by evaluating what the balance sheet will be used for.

2. Identify your assets

List all your assets and determine which are current assets and which ones are non-current or long-term assets. 

3. Identify your liabilities

Understanding the difference between expenses and liabilities is important before preparing a balance sheet. Research that and then break your liabilities into current, non-current, or long-term categories. 

4. Write formulas to calculate shareholders’ equity

Subtract total liabilities from total assets to calculate shareholder equity.

5. Add total liabilities to total shareholders’ equity and compare the result to assets

Check your work by doing the accounting equation in reverse. Add total liabilities to shareholders’ equity; you should get your total assets.  

Wrap up

Incorporating the balance sheet into your regular business operations can significantly boost your understanding of your company's financial trajectory, enable informed decision-making, and aid in securing capital. 

Yet, even with the help of advanced accounting or bookkeeping software, creating balance sheets can take time and effort.

Luckily, Rho's platform provides an all-in-one, fee-free solution that significantly simplifies balance sheet creation. Rho can save precious hours and streamline your financial operations by providing access to automated cash and spend management, banking, AP, and more. 

Get in touch with a Rho specialist to learn more today!

Kevin Flynn is a guest contributor. The views expressed are his and do not necessarily reflect the views of Rho.

Rho is a fintech company, not a bank. Checking and card services provided by Webster Bank, N.A., member FDIC; savings account services provided by American Deposit Management, LLC, and its partner banks.

Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.