BALANCE SHEET OF A COMPANY: STRUCTURE AND HOW TO DO IT - DUDAS - 2025

The balance sheet of a company reports the assets, liabilities and capital of the shareholders at any given time, giving a basis for calculating rates of return and evaluating its capital structure. It gives a photograph of the financial situation of the company in a single moment, what it owns and owes, and the amount invested by the shareholders.

The balance sheet is adjusted to the following equation, where assets are balanced on the one hand, and liabilities plus shareholders' equity on the other (assets = liabilities + equity). It is called balance because the equation balances or balances.

This is intuitive: a company has to pay for everything it owns (assets), either by borrowing money (assuming debts) or taking it from investors (issuing capital from shareholders).

The balance sheet, along with the income and cash flow statements, is the cornerstone of any company's financial statements.

Balance sheet structure

The balance sheet is made up of the following elements:

Assets

Assets are all the elements that the company owns. There are two types of assets: current and non-current.

- Current assets are the items that the company has acquired and that will be converted into cash in less than a year. Current assets are the same cash, inventories, accounts receivable and prepaid insurance.

- Non-current assets are the fixed assets owned by the company. Office equipment, building ownership, land, long-term investments, stocks, and bonds fall into this category.

Passives

They are payments that the company must make. Like assets, there are current and non-current liabilities.

- Current liabilities represent the payment obligations that the company must pay within the 12 months following the balance sheet date. For example, invoices payable to suppliers, wages payable, and income taxes payable.

- Non-current liabilities are amounts that the company has more than one year to pay. For example, bank obligations and debts. These liabilities are one of the sources of financing for the company's assets.

Capital

It is the part that the shareholders of the business own. Capital is another source of financing. When the obligations are subtracted from the assets of the company, the result is the capital. Capital is made up of paid-in capital and retained earnings.

- The paid-in capital is the amount that each shareholder initially paid for their shares.

- Retained earnings refer to the amount of money that the company did not sell to shareholders and instead reinvested in itself.

Types

There are several types of balance. The most common are the following:

Classified balance

It presents the information about the assets, liabilities and capital of a company classified in subcategories of accounts.

It is the most common type of balance sheet presentation, and it does a good job of consolidating a large number of individual accounts in a format that is fully readable.

Accountants should present balance sheet information in the same classification structure during different periods, to make the information more comparable.

Common size balance

It presents not only the standard information contained in a balance sheet, but also a column that places that same information as a percentage of total assets (for asset lines) or as a percentage of total liabilities and equity. It is useful for examining the relative changes in the size of different accounts.

Comparative balance

This format presents parallel information on the assets, liabilities and equity of a company from multiple moments in time.

For example, a comparative balance sheet could present the balance at the end of each year for the last three years. It is useful for highlighting changes over time.

Vertical balance

The balance sheet presentation format is a single column of numbers, starting with the individual asset items, followed by the individual liability items, and ending with the equity individual items.

Within each of these categories, items are presented in decreasing order of liquidity.

How to take a balance sheet?

The information needed to make a balance sheet is in the company's general ledger, where all financial transactions for a particular period are recorded.

Use the basic accounting equation

This is: assets = liabilities + equity.

The balance sheet of a company has three sections:

Assets

the resources it possesses.

Passives

The debts you have.

Heritage

Shareholder contributions and company profits.

Place header and date for balance sheet

Use the heading "balance sheet" at the top of the page. Below, list the name of the organization and the specific effective date of the balance sheet.

Assets section preparation

- List all current assets, which can be converted to cash in less than one year after the balance sheet date. They are listed in order of their liquidity, or the ease with which they could be converted to cash. Common accounts are: cash, marketable securities, accounts receivable, inventory, and prepaid expenses.

- Include the subtotal of current assets, calling it "total current assets".

- List all non-current assets or fixed assets, which are the property, plant and equipment of a company that are used for more than one year, less depreciation.

- List intangible or non-monetary assets that will last more than one year, such as patents, copyrights, trademarks.

- Include the subtotal of non-current assets, calling it “total fixed assets”.

- Add the subtotals of current and fixed assets, labeling it "total assets".

Preparation of the liabilities section

- Determine current liabilities, which mature within one year after the balance sheet date. Common accounts are: accounts payable, short-term notes.

- Include the subtotal of current liabilities and title it "total current liabilities".

- Calculate long-term liabilities, which will not be settled within a year. They include long-term notes and mortgages, pension plans.

- Include the subtotal of long-term liabilities and call it "total long-term liabilities".

- Add the subtotals of current and long-term liabilities. Name it "total liabilities."

Calculation of equity and totals

- Make a list of all capital accounts, such as common shares, treasury shares and total retained earnings.

- Calculate the retained earnings, which are the earnings that a company has obtained in a period of time. The balance of the previous period is searched for the amount of accumulated earnings, adding it to the profit obtained in the income statement, thus obtaining the total current retained earnings.

- All the patrimonial accounts are added, placing "total patrimony".

- Add the amounts of "total liabilities" and "total equity". Call it "total liabilities and equity."

- The balance sheet was prepared correctly if "total assets" and "total liabilities and equity" are the same.

Example

Here's an example of a small business balance sheet:

References

1. Investopedia (2018). Balance Sheet. Taken from: investopedia.com
2. Wikipedia, the free encyclopedia (2018). Balance Sheet. Taken from: en.wikipedia.org.
3. Rochelle Bailis (2017). 5 Simple Ways to Create a Balance Sheet. QuickBooks Resource Center. Taken from: quickbooks.intuit.com.
4. Sage Advice (2015). What are balance sheets and why are they important? Taken from: sage.com.
5. Corporate Finance Institute (2018). Balance Sheet. Taken from: corporatefinanceinstitute.com.
6. Small Business Development Corporation (2016). Example balance sheet. Taken from: smallbusiness.wa.gov.au.
7. Accounting Tools (2017). Types of balance sheet formats. Taken from: accountingtools.com.