Balance Sheet Format

A balance sheet is any report that shows what a company owns (assets), what it owes (liabilities), and what’s left when you subtract liabilities from assets (equity) at a specific point in time. 

It’s usually created at the accounting period’s end, such as a month, quarter, or year. This report is one of the three main reports that companies use to show their financial status, alongside the income statement and the statement of cash flows.

The following equation can summarise it:

Liability + Equity = Assets

Features of a Balance Sheet

Every balance sheet has the following characteristics:

• The capability to evaluate your company’s financial health and to prepare the evaluation at the end of an accounting year
• Listing the value of your company’s assets, also any debts or  liabilities incurred by your business (The sheet provides a detailed look at the company’s financials on a given day. The information can assess your company’s financial health and ability to meet its obligations)
• Inclusion of all accounts for assets and liabilities (However, expenses and revenues are not disclosed)
• Equalling both sides of the sheet, That is,

Asset = Liability + Equity

• Considering the current and personal accounts’ debit and credit balances (Your company’s assets are defined as debit balances in the real account. While the credit balance is your firm’s liability, it is recorded in personal history.)

Do you ever wonder why a balance sheet matters and who would need it? 

Well, people like creditors, investors, and others use it to see if a company is financially stable.

Purpose of a Balance Sheet

Now that you know who would need a balance sheet, do you know its true purpose in the business industry?

Well, it’s a document that helps your business’s financial situation, but this is why you should actually care about a balance sheet.

1. Not just for businesses, it can be helpful for you too.
2. It shows what a business owns, what it owes and how much the owner invested.
3. It helps you see how your company is doing now and how it has been doing in the past.
4. It can help you understand your financial position and make decisions, especially if you find it hard to manage your finances.
5. It helps with making choices about new projects or unexpected costs.
6. You need a balance sheet if you want a loan to start or grow your company.
7. Looking at the balance sheet, you can easily find if a company is using its profits or borrowing money to run its operations.

How to Prepare a Balance Sheet

Now that you understand a balance sheet’s purpose, are you ready to learn how to create one for your financial management? Take note of the steps below:

• Determine the Reporting Date and Period.
• Determine Your Assets.
• Determine Your Liabilities.
• Determine Shareholders’ Equity.
• Calculate Total Liabilities.
• Compare Liabilities to Total Shareholders’ Equity.

Also Read  How to make balance sheet format?

Terms You Need to Know While Preparing a Balance Sheet

Reserve

A reserve refers to a sum of retained earnings that your company has set aside for the following:

• To strengthen its financial position
• To pay off debt and credit
• To purchase fixed assets
• To expand the business
• To fund other plans

These funds do not have any legal restrictions, so the company can use them for any purpose. Examples of uses for reserves include issuing customer refunds and covering registered but unpaid expenses. 

Liabilities are recorded for balance sheet reserves on the balance sheet.

Consolidation

A consolidated balance sheet has the assets and liabilities of a parent company and its subsidiaries in a single report. The sheet does not identify which item belongs to which company. This type of balance sheet is typically required when a company has a controlling interest in another company or its business.

Vertical Balance Sheet

One variation of a balance sheet is a vertical balance sheet. A vertical balance sheet lists the assets and liabilities separately, with assets on the left and liabilities on the right. This format is helpful for quickly seeing the relationship between a company’s assets and liabilities. In addition, it can make it easier to identify any potential financial risks.

Provisional Balance Sheet

Another variation of a balance sheet is a provisional balance sheet. A provisional balance sheet is a preliminary version of a balance sheet, often used when a company is preparing its financial statements. It may include estimates and assumptions subject to change as more information becomes available.

It’s essential to regularly review and update your balance sheet to reflect your company’s financial position accurately. Once you learn how to create a balance sheet, you can dive deeper into creating a consolidated one.

Listed below are the steps you must follow for a consolidated balance sheet creation:

1. Assign a title, a subsidiary’s name, and a current date to the document.
2. Make an asset, liability, and equity section in the left-hand column.
3. Ensure that the worksheet’s consolidated trial balances match the sheet’s figures.
4. Go to your combined balance sheet to incorporate the data from your worksheet.
5. Note that the total assets, liabilities, and equity should be similar to the parent company. Finally, remove all the duplicate items and add subsidiaries.

Format of a Balance Sheet

The T-shaped or horizontal balance sheet format is as follows:

The new balance sheet format is also referred to as the “vertical format balance sheet,” as it begins with equity and liabilities and concludes with assets.

With a solid understanding of a balance sheet and its formats and details on how to create a balance sheet, you’ll be able to make informed business decisions and keep track of your company’s financial health.

It may appear complicated due to the abundance of jargon, yet it could be more sophisticated than they sound. However, once you understand the meaning of the financial statements, analysing the balance sheet is quite simple.