Simple steps to prepare a balance sheet

A major roadblock many fledgling businesses face is the preparation of a balance sheet. It seems complex to enter all the financial information about a company in a single document. In reality, you can make a balance sheet from scratch with minimum accounting experience. Here is a step-by-step guide to help you make a balance sheet from an income statement.

How to prepare a balance sheet in six easy steps

1. Fix the date: A balance sheet pertains to a specific day. Select the day for which you want your balance sheet. It is a good idea to choose the last day of a month, quarter, or year. This will give you a complete picture. Remember to update your income statement and ledgers at least up to the date of the balance sheet.

2. Prepare the structure: Your consolidated balance sheet should have three main heads—assets, liabilities, and owners’ equity. Here, the total assets should be equal to the sum of liabilities and owners’ equity.

3. Prepare the asset column: List all assets under the following heads. Add them up to get the total assets.

· Current assets: These are the company assets you can convert into cash within a year of the balance sheet date. These include cash, deposits, and accounts receivable. List these in the order of decreasing liquidity.

· Long-term assets: These are assets that the organisation can use for more than one year, after deducting depreciation. They include fixed assets like plant and building, and investments like long-term debentures.

· Intangible assets: These assets are not easy to quantify. They include patents, goodwill, copyright, and trademark. You quantify them using a set of evaluation rules and add them to the asset column.

4. Prepare the owners’ equity column:

· Calculate the retained earnings: This stands for the profit made by the company since the last balance sheet. You calculate this by adding the closing balance of retained earnings of the previous period to the net revenue and deducting dividends paid.

· List all equity accounts: These include common stock and treasury stock. Add the retained earnings to this list.

· Calculate the total owners’ equity: The sum of equity accounts and retained earnings should give you the total owners’ equity.

5. Prepare the liability column: List all liabilities under the following heads. Then add them up to get the total liabilities:

· Current liabilities: These are the liabilities that are due within one year of the balance sheet date. They include accounts payable, short-term notes payable, and accrued liabilities.

· Long-term liabilities: These are company liabilities that do not need to be settled in the coming one year. They include mortgages, pension liabilities, and long-term bonds payable.

6. Balance your columns: Your assets should be in one column, and your liabilities and owners’ equity in the second column. The totals of the two columns should be equal.

To make the process even easier, here is a simple example of a balance sheet that can guide you:

Balance Sheet of ABC Ltd. on 30 September 2016 in Rs Crore

Assets

Liabilities

Current assets

20

Owners’ equity

55

Cash and bank

7

Common stock

30

Inventory

2

Treasury stock

5

Accounts receivable

11

Retained earnings

20

Long-term assets

57

Current liabilities

12

Building

25

Accounts payable

8

Plant

20

Accrued liabilities

4

Equipment

12

Long-term liabilities

13

Patents

2

Mortgages

10

Copyrights

1

Bonds payable

3

Total

80

Total

80

In this balance sheet, the total asset value is Rs 80 crore. This is equal to the sum of the total liabilities and owners’ equity value. And that is just how simple it is to prepare a balance sheet.