How to Calculate the Balance Sheet
A balance sheet is the financial document that presents all of the things you own, all of the things you owe, and the net worth of the business, and all of the things you own are called assets, the things you owe are called liabilities, and the worth of the business is called equity. The main objective of the balance sheet is to show the condition of your business at a single point in time for example, on December 31, 2008 or on April 15, 2009. A balance sheet derives its name from the fact that the assets must always equal the liabilities plus the equity, in other words, by being equal they are in balance.
In its simplest form, a balance sheet statement is presented as follows:
–>Assets (the things you own)
–>Minus Liabilities (the things you owe)
–>Equals Net Worth (the owner’s equity or stake in the business)
Said another way, Assets will always equal your Liabilities plus your Equity in the business, and when your assets are equal to your liabilities and equity, the statement is said to be equal or in “balance,” hence the name balance sheet.
It’s not necessary to create a balance for each month such as you do for the income statement and cash flow statement, so having a year-end balance sheet will usually be sufficient enough, and if you try to create a balance sheet for the end of your first year it’s easy to get very frustrated when trying to make the statement balance. The secret to making this task easier for yourself is creating a “base period” balance sheet which is in essence a balance sheet before your financial projections begin, and using this base period balance sheet makes it much easier to create your year-end sheet.
If you are an existing business, creating a balance sheet may be very simple indeed and if you run an automated or computerized accounting system such as QuickBooks or Peachtree, you can have the system generates a current balance sheet report for you, and this report in essence, becomes your base period balance sheet. If you don’t have such a system, your tax returns from the previous year might have a balance sheet for your business or you can use an accountant to generate such a report.
For startup businesses, you will have to create the base period balance sheet from scratch, but this is not nearly as hard as it sounds. To begin with, you should have created as part of your assumptions a startup cost assumptions sheet (uses of money) and a financing assumptions sheet (sources of money), and these two sets of assumptions will provide everything you need to create your base period balance sheet.
The easiest way to develop a base period balance sheet for a startup business is to just take a list of your required startup assets (which may include inventory, supplies, buildings, equipment, deposits, operating capital, etc.) and itemize these assets at the top part of the balance sheet. Next, if you are going to secure a bank loan or other debt financing place this amount under the liabilities heading and don’t place any outside investor money here unless it is in the form of a loan. Finally, take the total assets you listed (you are required startup costs) and subtract any liabilities you identified, and this number should be placed under the owner’s equity heading.
Once you have created your base period balance sheet, you already to then create your year-end statement and in order to complete your year-end balance sheet, it is necessary to have first completed your projected income statement and projected cash flow statement since these two statements provide certain numbers that you will need. To create the year-end statement will first start with your assets, and that there are really only 2 to 3 numbers that you will need to change or modify from your base period numbers.
In general, you can usually transfer many of the numbers from your base period balance sheet over to your year-end statement, and the exceptions to this would include such instances where you acquired any new assets which need to be added to this section of the statement under the appropriate heading, and three things that might change however, are your cash balance, your account receivable balance, and your depreciation amounts.
Getting your new cash balance for your year-end balance sheet is fairly simple, as all you need to do is look at the last months ending cash balance on your cash flow statement, and that number is your new cash balance on your balance sheet, so simply just transfer it over and you are done.
You only have to worry about adding an Accounts Receivable number to your year-end balance sheet if you sell products or services on account to customers, in other words, if you offer credit and invoice customers. Accounts receivable are those monies is still a mood to you after you have made a sale and the easiest way to find this number is to simply take your total income or sales found on your income statement and then subtract any cash sales and accounts receivables you have collected that are found in the cash inflows section of your cash flow statement. This number is the amount of money still owed to you at year-end and should go on your balance sheet under the heading “Accounts Receivable.”
Since depreciation is the decline in the value of a property due to general wear and tear or obsolescence, you need to find any depreciation expense for the year and subtract it from your assets being depreciated, and to find this number, all you have to do is look on your projected income statement for depreciation, and if there is any depreciation listed, find the total amount for the year and simply listed and subtracted from your assets on your year-end balance sheet.
If you made any loan principal payments on your cash flow statement, then you need to decrease any loan balances accordingly and the first thing you need to do to find your new notes payable liability balance is to find the amount of any principle paid, and this number cannot be found directly on any of the statements themselves so you have to calculate it. To find the number, simply take the total of your loan payments from your cash flow statement and subtract any interest paid as found on your income statement, and the resulting number is the total principal payments you made.
Once you have your total principal payments made over the course of the year, you simply subtracted from your base period liabilities balance, therefore, a review of this process look something like this:
–>Total loan payments (from your cash flow statement)
–>Minus total interest payments (from your income statement)
–>Equals total principal payments made
–>Subtracted from base period balance sheet liability number
The final step in creating your year-end balance sheet is to calculate your new equity numbers and this is fairly simple, unless you or any other owners have contributed money to the business, the only number you need to add to the equity section of the balance sheet is the profits generated by the business called “retained earnings.” Your retained earnings number is simply the total number of profits found on your projected income statement on the net income line.
Once you have your new liabilities balance and your new equity numbers, your balance sheet should balance, and if it doesn’t balance, then chances are you may math error on one of the two other statements (the income or cash flow statement), and you should recheck your math. Also, it can be useful to find the difference between the total assets and total liabilities and equity numbers to see just how much the error is, and the difference between these two numbers may help you identify where your error is located.
Once you get your year-end balance sheet to equal or balance, then you have completed a comprehensive set of financial projections and don’t get too frustrated if you have trouble getting your balance sheet to work out. There are a number of predesigned spreadsheets which can perform such calculations for you, but you still need to understand where these numbers come from when meeting with outside funding sources, and it can also help you to look at an example of a good projected balance sheet.