The importance of a balance sheet in determining the state of a business’s finances is immense.
Analysing a balance sheet gives you an idea of how healthy your finances are based on various parameters, such as whether the income matches the expenses.
If you run a startup business and are looking for a comprehensive guide to understanding and preparing a balance sheet, this post is for you. We’ll discuss everything from what goes into a balance sheet to the steps you need to take in creating it.
What is a Balance Sheet?
A balance sheet is a financial statement that highlights what a startup business owes and owns as assets and liabilities.
Apart from this, the balance sheet shows the startup owner’s equity, which represents the total assets of a business that owners can claim.
Components of A Balance Sheet
Here are the three main components of a balance sheet:
- Cash reserves or how much cash the business has on hand
- Various prepaid expenses such as rent, taxes, and insurance
- Inventory of property, goods, and patents
- Investments such as bonds, stocks, real estate, or other long- or short-term investments
- Accounts payable by businesses, including fuel and energy costs, leases, transportation, services, or any other logistical obligations
- Any kind of interest owed by a startup representing the total amount of interest the business owes to lenders
- Any debt owed to the shareholder
- Any leftover assets after all business abilities have been accounted for
Why Does Your Startup Business need a Balance Sheet?
The balance sheet is an important document you can provide to potential lenders to get a startup loan.
It also gives a clear snapshot of the business at different points in time and shows the complete financial position of the startup business.
Balance Sheet Format
A balance sheet template or format offers you the basic layout and structure to create a sheet.
Here’s a format that startups can use:
How a Balance Sheet Differs from a Trial Balance
A balance sheet and a trial balance are very important financial documents for any business. But the two differ in many ways.
A balance sheet summarises the company’s total assets, liabilities, and shareholders’ equity. A trial balance, on the contrary, summarises the closing balance of the various general ledgers of the company.
Other differences between the two are as follows:
|What it records||The balance sheet records the assets, liabilities, and equity of the company||Trial balance records all the closing balances of the general ledgers of accounts|
|What is it used for?||The balance sheet is used for external purposes||Trial balance is used internally within the company|
|When is it recorded?||The balance sheet is recorded at the end of every financial year||The trial balance is recorded at the end of the quarter, half-year, and year|
|Auditor approval||The balance sheet requires the signature of an auditor||Does not require the approval of an auditor|
Steps in Preparing a Balance Sheet
Here are the steps you can follow to prepare a basic balance sheet for your startup:
A. Determine the Balance Sheet Reporting Date
The key aim of the balance sheet is to show all the assets, liabilities, and shareholders’ equity of a business either on a specific day of the year (known as reporting day) or within a given period.
In most cases, companies prepare the balance sheet reports every quarter (last day of March, June, September, and December).
However, you may also choose to prepare your business balance sheet every month, where you will have to report on the last day of each month and list down all of your assets.
B. Identify Your Business’s Assets
Once you fix a date, your next task is to list out all of your current assets as of that date.
You can usually list assets in two ways:
- As individual line items
- As total assets
Doing so makes it easier for you to understand your assets and tally them together for final analysis. Assets here are often split into the below items:
- Current assets include accounts receivables, cash and cash equivalent, short-term marketable securities, and other current assets.
- Non-current assets include property, goodwill, long-term marketable securities, intangible assets, and other non-current assets.
You should subtotal these current and non-current assets and then total them together.
C. Identify Your Business’s Liabilities
Similar to the previous step, you will need to identify your liabilities and organise them into both line items as follows:
- Current liabilities include accrued expenses, accounts payable, deferred revenue, the current portion of long-term debt, and other current liabilities.
- Non-current liabilities include long-term debt, deferred revenue (non-current), long-term lease obligations, and other non-current liabilities.
D. Calculate Shareholders’ Equity
Under this section, you need to include the total amount invested in the business by shareholders and the business owner. Make sure to add any retained earnings that went into the business and add these as the total equity.
Some of the common line items added in this section of the balance sheet include:
- Preferred stock
- Treasury stock
- Common stock
- Retained earnings
E. Add up the Assets and Liabilities and Ensure that the Accounting Equation is Balanced
In the final step, you need to add up the total assets, total liabilities, and equity of the startup business.
You need to compare the two values and make sure they tally. If they do, that means your balance sheet is complete.
In case they don’t tally, revisit your data to check for any miscategorised figures, check for omitted entries, and work on the balance sheet again till it tallies.
Track Your Startup’s Growth with A Well-Maintained Balance Sheet Format
Maintaining a clear and simple balance sheet is a smart way to track your startup business’ growth as it expands further.
Apart from managing other aspects, such as a well-functioning website and domain name, ensure you have a balance sheet to regulate smooth cash flows in your startup. Also, to determine what you own versus what you owe as a business.