Balance Sheet

The balance sheet is a financial document that represents the situation of a company at a certain time. The information it contains includes the resources that the organization has (assets), the resources that it must pay (liabilities) and the difference between the two (equity).

This document is vital for the management and investment of any organization. Since it describes the financial situation of a fixed time, not dynamic, it is necessary that you do it repeatedly, once a year at least. In this way you can easily access the most relevant balances of your business: your profits and your expenses.

Balance Sheet Types

1. Comparative Balance Sheet

Evaluates the evolution of the business and can be compared with past accounting years. For this, it is necessary to have a financial history that allows observing the differences between a current balance sheet and a previous one, which reflects whether the company’s performance has increased or decreased over time.

2. Consolidated balance sheet

It is used by companies with different subsidiaries to generate a single balance sheet. So it contemplates in all its subsidiaries a single document or spreadsheet, to determine the general situation of the company in terms of assets, liabilities and equity.

3. Estimated Balance Sheet

It is elaborated with preliminary data to later verify them with the final version. Therefore, the figures in these documents are determined by assumptions and are subject to subsequent corrections. It is used to make an approximation of the results that can be obtained at the end of a period. This allows companies to take action regarding anticipated profits and expenses.

4. Proforma balance sheet

It makes projections on the components of the balance sheet and is useful for evaluating projects and knowing if they are viable or not. It is similar to the estimated balance sheet, but instead of working with preliminary data, it makes a prediction of the future financial situation of the company with the data that has already been obtained.

The balance sheet must be carried out at least once a year to have an overview of the financial situation of the company. Keeping this information in order allows you to have healthier accounting and administrative management.

Goals of a Balance Sheet

The main function of the balance sheet is to have control of the finances of the companies, but, specifically, it also covers the following objectives:

1. Know the financial position of the company in a given period.
2. Obtain relevant information for better financial decision making.
3. Know the nature and value of assets, liabilities and patrimony.
4. Maintain business solvency.
5. Ensure the current capacity of the company.
6. Detect in a timely manner the surpluses and insufficiencies in your cash funds or the excess of debts contracted.

Balance Sheet Structure

Knowing the structure of a balance sheet is essential to record the information in an orderly and precise manner. It is usually done in spreadsheets. Next we will see what it consists of:

• header . Corresponds to the upper part of the document, where the name of the company is placed; it is indicated that it is a general balance, the period of analysis, the date and type of currency or currency.
• Left column . Here the resources or investment that the company has are listed, that is, fixed, current and deferred assets.
• Right column . It is divided into two parts. In the first, it breaks down the resources that the company owes: fixed, long-term and deferred liabilities. In the second, it indicates the equity, which includes the social capital (own and external financing) and the net profit of the year (difference between assets and liabilities).
• signature . In the lower part of the document it is reported who made the balance sheet (accountant or administrator) and who authorized the data obtained (owner), with their respective signatures.

Now that you know the basic structure of the balance sheet, we will show you what each of its components refers to.

Balance Sheet Components

Assets

Assets are all those goods or rights that a company (or individual person) owns and that may have the intention of becoming an economic benefit for the future. These are classified according to how easy they are to convert into money:

• Fixed asset . Also called a non-current asset, since it is not very liquid and does not vary during the fiscal year. They are all those tangible or intangible assets that a company requires to function, for example: land, buildings, machinery, furniture, transportation, etc.
• Current assets . It is also known as current assets and is the liquid asset at the time of the closing of an exercise in a period of less than one year. This can be sold, used, converted into cash or given as payment. Some of its components are cash on hand and in banks, accounts receivable, and items in manufacturing process.
• Deferred assets . They represent those goods  that a company acquires or buys, but that it does not use or consume immediately .

Assets can define their value according to their historical cost, their fair or current value, cost of sale or amortized cost , and their book or residual value.

Passives

Liabilities correspond to all debts and economic obligations of a company. These are adopted and used to finance the activity of the operations and serve to pay for the assets. To understand it better, we can use the example of an individual person who buys a house through a bank loan. The house is your asset and the money you owe is your liability.

Passive expenses are also categorized into different aspects:

• Current liabilities . They are the debts that the company has for a period of less than one year.
• Long-term liabilities . These are debts that must be paid in a period greater than one year.
• Deferred liabilities . They are the debts that correspond to income that the company received  in advance to provide a service or make a sale in the future .

Heritage

On the one hand, there is the social capital, which is all those elements that constitute a company’s own financing, for example, the money contributed by partners or investors and financial reserves. On the other hand, there is net income or net capital, which is the result of subtracting assets and liabilities.

1. Collect and add up your assets

At the beginning of your structure, indicate the name of your company, the year (in this case, the balance sheet) and the period. Following this, divide your fixed and current assets as follows. Add up each of them and finally get the total of the assets.

2. Collect and add up your liabilities

Just like you did with assets, list all of your current and fixed liabilities; do a sum of each and after the two results.

3. Collect and add your assets

Do the same process as steps 1 and 2 and add your assets, as in the following image:

4. Check your heritage

To check your assets you must use the following formula:

The subtraction of assets and liabilities must be the same amount as your net income for the year, as shown in the following image:

Finally, you should only collect the signature of the person who must authorize the balance sheet and the signature of the person who prepared it.

Example of a Balance Sheet

To finish understanding how to make a balance sheet, we share the following example. It will have a different format: the one we did previously has a report format and this one is for calculation.

1. We will start with a share capital of $70,000 that was included by a partner of the company.

2. This amount must also be reflected in the asset section, specifically in the cash or bank section.

3. As this company draws up its balance sheet, it verifies that its amounts are balanced. That is to say, that the sum of the assets is also consigned in the patrimony. In this way, you will be able to know that your balance sheet is being correct.

Suppose that another partner of the company will contribute another amount to the social patrimony. This amount will be $100,000 but in raw material. That must be added in the social heritage box. At the same time, it must be added to the assets, but in the warehouse element, since the estate provided it in the form of a product and not in cash.

4. The next thing is to include a credit previously requested from the bank. This amount will go directly to the liability component, in the bank credit element. This will cause the sum of liabilities plus equity to be different from that of assets.

This difference is because that loan has not been reflected in the assets. To reflect them, that amount must be included in cash assets, since it is made up of cash. Immediately, the sum of the assets will be equal again to the patrimony.

5. Now, suppose this company makes a product purchase in the amount of $150,000 from suppliers. This credit also has to be reflected in the assets and will be made directly in the warehouse, since it is a product purchase. That quantity is added to the one already established in that element.

Now, a sale will be made to the client for the amount of $350,000 of product, but since only $150,000 of that $250,000 was used, then that amount is subtracted from the results it has in store.

6. Once again, the final amounts are different, but the remaining profit is included in the equity component, in the element of profit or loss for the year. If the amount of the sums is the same in both assets and liabilities, it means that the balance sheet reflects a good balance point; Otherwise, it will be reflecting an error or a financial loss.