Introduction:

The balance sheet discloses the financial condition of a company at a specific period of time. It presents a summary of the business's assets, liabilities and stockholders' equity.

It is absolutely critical for companies to prepare accurate balance sheets as this gives potential investors and lenders insight into its financial strength. Without a concise balance sheet, you'll never interest a serious investor and no lender will extend you a significant line of credit. 

This checklist will guide you through the balance sheet creation process from gathering important financial documentation to reviewing and verifying a completed statement. 

Let's get started. 

Preparation:

Gather necessary information

Before beginning to build your balance sheet, ensure you have gathered all of the necessary information you need to reflect changes in the company's assets, liabilities, and equity. 

Any source that shows updated account balances can be used. However, the most appropriate document to have on hand would be the adjusted trial balance. 

Know the balance sheet's basic accounting equation

 The basic accounting equation is shown below:

The above accounting equation shows that what a business owns is acquired through a combination of funding arising from both indebtedness (liabilities) and its own money (owner's equity).

Hence, the balance sheet is comprised of the following components: Assets, Liabilities and Owner's Equity.

Building the statement:

Create the header of the balance sheet

Now you need to create the header of the balance sheet. Fill in the form fields below with the relevant information for ease of access.

You can download a free balance sheet template provided by Money-Zine.

Determine and classify assets

Assets are simply defined as anything that the business has ownership of by its acquisition at a certain point in time and recorded in its financial history.

Record the relevant assets in the form fields below.

    Examples of assets that are reported on a company's balance sheet include:

    Current Assets

    Current assets are those that can be converted into cash within one year of the business's normal operating cycle.

    • Cash
    • Accounts receivables (A/R)
    • Inventory
    • Notes receivables (N/R)
    • Prepaid expenses
    • Other current assets

    Investments

    Investments are assets investments whose maturities exceed one year.

    Examples:

    • Bond sinking fund
    • Funds held for construction
    • Cash surrender value of life insurance policy
    • Long-term investments in stocks and bonds

    Returns on these investments can be realized over the long-term considering that its payback period is more than a year.

    Fixed Assets

    Fixed assets, otherwise known as long-term assets, are those assets holdings with a long-term physical value such as land, buildings, and machinery.

    List of fixed assets:

    • Land
    • Buildings
    • Machinery and equipment
    • Furniture and fixtures
    • Leasehold improvements

    With the exemption of landholdings, these long-term assets are subjected to depreciation charges that must be taken into account by applying the depreciation method of accounting.

    Intangible Assets

    Intangible Assets are those assets with significant long-term value without any physicality whose benefits extends a few years or beyond. It is usually recorded at cost based on a specified period of time in the balance sheet.

    List of Intangibles:

    • Research and development
    • Patents
    • Market research
    • Goodwill
    • Organizational expense

    Some of these intangibles are amortized over their estimated useful life.

    Other Assets
    • Deposits (maturity of  more than one year) 
    • Notes Receivables from Third Parties
    • Bond Issue Costs amortized to expense over the life of the bond.
    • Other Deferred Costs (Unamortized Bond Issue Cost)

    Calculate total assets

    Calculating the total assets is done through the process of adding up current assets to other non-current asset categories such as investments, fixed assets, intangible assets, and other assets. Record the total asset value in the form field below.

    Determine and classify liabilities

    Identify the enterprise's liabilities and make a comprehensive list of them by using accounting records as reference. Make a list of the enterprise's liabilities in the form fields below.

    Current Liabilities

    • Accounts payable bills (credit cards, cell phone bills, electricity, and water bills)
    • Short-term notes payable
    • Taxes payable
    •  Wages payable
    •  Insurance payable
    •  SSS payable
    •  Unearned revenues

    Must be paid within a few months or so within one year or within the company's normal operating cycle.

    Long-term Liabilities 

    •    Long-term notes payable and mortgages
    •    Bonds payable
    •    Long-term capital leases

    Represent financial obligations that do not have to be paid within one year or within the company's normal operating cycle.

    Contingent Liabilities

    •    Warranty of company's products
    •    Guarantee of another party's loan
    •    Lawsuits against the company

    Represent liabilities that may happen depending on the outcome of some business transactions.

    Compute total liabilities

    Next, you need to determine the total liabilities value and record it in the form field below.

    To compute total liabilities:

    Total liabilities are shown on the second part of the balance sheet and will be added to stockholder's equity.

    Determine stockholders' equity

     What comprises stockholders' equity accounts?

    • Authorized Capital Stock: The number of shares authorized to sell to investors, priced at a cost which is the Par Value.
    • Subscribed, Issued and Paid-up accounts: are the number of shares sold to investors and fully-paid such as Common and Preferred Stock.

    Note: The difference between common and preferred stock is that the latter gets priority in receiving dividends.

    • Ending Balance, Retained Earnings (R/E) is the earnings retained on previous accounting period.
    • Net Income is the net profit generated for the recently-concluded accounting period.
    • Dividends Paid in cash declared by the Board of Directors.
    • Treasury Shares are shares of the company bought back from another company, sometimes referred to as redemption of stocks.

    The financial prosperity of the enterprise depends upon how it finds ways to increase its equity or net worth. Coming up with a financial plan where the enterprise can reduce its liabilities while increasing its asset holdings is the best way towards the attainment of economic prosperity for the business.

    Calculate stockholders' equity

    Next you need to determine the stockholders' equity. Record it in the form field below.

    In generally-accepted accounting practice, the basic accounting equation given below is used to arrive at the stockholders' equity equation:

    It is transposed to get the formula for the Stockholders' equity shown below:
    NOTE: For more details, kindly refer to "Review Balance Sheet".

    Compute liabilities and stockholders' equity

    The second-to-last step is to calculate the total for the liabilities and stockholders' equity. Record this in the form field below.

    To compute for the Liabilities and Stockholders' Equity:

    Review the balance sheet

    Once you have all of this data your balance sheet should be complete! Remember to upload a copy to the form field below for safe keeping.

    Double-check all the figures and computations, then present the financial statement in its wholeness as follows :

    Refer to this article for more information. 

    Sources:

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