How to Prepare a Balance Sheet

The "Balance Sheet", also known as "Statement of Financial Position", shows a company's financial condition as of a certain date.

Financial condition is presented by reporting how much assets the company owns, how much liabilities it owes to others, and its equity or capital (assets minus liabilities).

In this tutorial, we will continue the illustration from previous lessons and prepare a balance sheet. Like the other financial statements we have prepared, we will use this adjusted trial balance: Adjusted Trial Balance. If you wish, you may take a look at a balance sheet example here before we proceed.

Let's begin.

Step 1: Gather the needed information

Like in any other financial statement, we need to gather information to be used in preparing a balance sheet. Any source that shows updated account balances can be used. The most appropriate tool for this, however, would be the adjusted trial balance.

Gray Electronic Repair Services
Adjusted Trial Balance
December 31, 2014
         
Account Title   Debit   Credit
Cash   $    7,480.00    
Accounts Receivable   3,700.00    
Service Supplies   600.00    
Furniture and Fixtures   3,000.00    
Service Equipment   16,000.00    
Accumulated Depreciation       $      720.00
Accounts Payable       9,000.00
Utilities Payable       1,800.00
Loans Payable       12,000.00
Mr. Gray, Capital       13,200.00
Mr. Gray, Drawing   7,000.00    
Service Revenue       9,850.00
Rent Expense   1,500.00    
Salaries Expense   3,500.00    
Taxes and Licenses   370.00    
Utilities Expense   1,800.00    
Service Supplies Expense   900.00    
Depreciation Expense   720.00    
Totals   $  46,570.00   $  46,570.00

Step 2: Prepare the heading

The first line contains the name of the company. The second line shows the title of the report. We can use either "Balance Sheet" or "Statement of Financial Position". The third line indicates the date of the report.

The income statement, statement of changes in equity, and statement of cash flows use For the Year Ended, For the Month Ended, For the Quarter Ended, etc. However, we cannot use any of those phrases in a balance sheet since we are not reporting information for a period of time, but rather, information as of a certain date.

Therefore, we shall use "As of...". Though, some balance sheets omit the phrase.

Gray Electronic Repair Services
Balance Sheet
As of December 31, 2014
       

Step 3: Report all company assets

From the trial balance, we take all assets and report them in the balance sheet. Current assets are normally reported first before non-current assets. After which, we will compute for total current assets, total non-current assets, and total assets. A single line is drawn every time a mathematical operation is made. The amount of total assets is double-ruled.

Gray Electronic Repair Services
Balance Sheet
As of December 31, 2014
         
ASSETS
Current Assets:      
Cash $   7,480    
Accounts Receivable 3,700    
Service Supplies 600    
Total Current Assets     11,780
Non-Current Assets:      
Furniture and Fixtures $   3,000    
Service Equipment 16,000    
Less: Accumulated Depreciation 720    
Total Non-Current Assets     18,280
TOTAL ASSETS     $  30,060

Note: The above step requires you to be familiar with assets accounts. The next steps will require knowledge of liability and capital accounts. If you need a review of different accounts, you may visit this lesson: Elements of Accounting.

Step 4: Report all liabilities

After the "assets" portion, we will now present "liabilities and capital". We will start by presenting current liabilities, followed by non-current liabilities. After that, we will take the totals of each as well as the amount of total liabilities – just like what we did for assets.

Gray Electronic Repair Services
Balance Sheet
As of December 31, 2014
         
ASSETS
Current Assets:      
Cash $   7,480    
Accounts Receivable 3,700    
Service Supplies 600    
Total Current Assets     11,780
Non-Current Assets:      
Furniture and Fixtures $   3,000    
Service Equipment 16,000    
Less: Accumulated Depreciation 720    
Total Non-Current Assets     18,280
TOTAL ASSETS     $  30,060
       
LIABILITIES AND CAPITAL
Current Liabilities:      
Accounts Payable 9,000    
Utilities Payable 1,800    
Total Current Liabilities     10,800
Non-Current Liabilities:      
Loans Payable 12,000    
Total Non-Current Liabilities     12,000
Total Liabilities     20,800

Step 5: Report the ending balance of capital after total liabilities

The trial balance above does not show the ending balance of capital. The ending balance of capital can be taken from the Statement of Changes in Equity. If you have been following our tutorials, we prepared it before preparing this balance sheet. In any case, any source may be used as long as it gives you the ending balance of capital.

After including capital, we will take the total amount of "liabilities and capital". That amount is double-ruled.

Gray Electronic Repair Services
Balance Sheet
As of December 31, 2014
         
ASSETS
Current Assets:      
Cash $   7,480    
Accounts Receivable 3,700    
Service Supplies 600    
Total Current Assets     11,780
Non-Current Assets:      
Furniture and Fixtures $   3,000    
Service Equipment 16,000    
Less: Accumulated Depreciation 720    
Total Non-Current Assets     18,280
TOTAL ASSETS     $  30,060
       
LIABILITIES AND CAPITAL
Current Liabilities:      
Accounts Payable 9,000    
Utilities Payable 1,800    
Total Current Liabilities     10,800
Non-Current Liabilities:      
Loans Payable 12,000    
Total Non-Current Liabilities     12,000
Total Liabilities     22,800
Gray, Capital - ending     7,260
TOTAL LIABILITIES AND CAPITAL     $  30,060

Total assets should be equal to total liabilities and capital. If they are not, then something must have gone wrong during the process.

There you have it. The balance sheet we have just prepared is for a sole proprietorship business. In a partnership, several capital accounts will have to be presented – one for each partner. In a corporation, the capital portion is known as stockholders' equity and is made up of capital stock, reserves, and ending balance of retained earnings.

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