A balance sheet is a financial statement that shows what a business owns and what it owes at a specific point in time. It gives a clear picture of a company’s assets, liabilities, and owner’s equity, making it one of the most important tools in bookkeeping and accounting.
For small businesses, a balance sheet acts like a financial snapshot. It helps owners understand their company’s health, track growth, and make better decisions. In this guide, you’ll learn step-by-step how to prepare a balance sheet, the basic formula behind it, and why it matters for your business.
Step-by-Step: How to Prepare a Balance Sheet
Pick the reporting date
Decide the date your balance sheet will reflect—month-end, quarter-end, or year-end. Most businesses align this with their accounting period. If you’re using software like QuickBooks or Xero, you can select the reporting date directly and the system will generate the data for you.List assets
Record everything the business owns. Accounting software can automate this, but here’s what to include:
- Current assets: cash (bank accounts), accounts receivable, inventory. Tools like Wave Accounting or FreshBooks can track these in real time.
- Non-current assets: property, equipment, vehicles, or long-term investments.
List liabilities
Identify what the business owes:
- Current liabilities: accounts payable, credit card balances, short-term loans. These can be pulled easily from QuickBooks Online or your bank feeds.
Long-term liabilities: mortgages, equipment loans, bonds. Accounting systems let you set these up to track monthly payments and balances.
Calculate owner’s equity
This includes:
- Owner’s contributions (capital invested)
- Retained earnings (profits reinvested)
Shareholder equity (if incorporated)
Most bookkeeping tools automatically update equity once assets and liabilities are entered.
Apply the balance sheet formula
Always check the formula:
Assets = Liabilities + Owner’s Equity
If both sides don’t match, there may be missing entries or misclassifications. Software often highlights these imbalances, saving you manual checks.
Mini Example (using QuickBooks or Excel):
- Assets: $50,000 (cash $20k, receivables $10k, equipment $20k)
- Liabilities: $30,000 (loans $25k, accounts payable $5k)
- Equity: $20,000 (owner’s contribution + retained earnings)
$50,000 = $30,000 + $20,000 → Balanced!
Why Balance Sheets Matter for Small Businesses
- Shows financial health: Quickly see whether your company is stable, growing, or carrying too much debt.
- Helps secure loans or investors: Banks and investors rely on balance sheets to judge whether your business is a safe bet.
- Supports better decision-making: Helps you know when to reinvest, cut costs, or plan for expansion.
Conclusion
Preparing a balance sheet is simple once you master these steps: selecting the right reporting date, listing assets and liabilities, calculating owner’s equity, and ensuring Assets = Liabilities + Equity. This process gives you a clear snapshot of your business’s financial health and supports smarter decision-making.
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