subject: Setting Up a Balance Sheet Made Easy [print this page] A balance sheet is one of the key financial statements that are used by virtually every business or corporation in the world. The balance sheet provides a user with financial information for a specific point in time. It is broken down into three different sections: Assets, Liabilities, and Owners Equity. All of these are components of the Accounting Equation, which is assets = liabilities + owners equity. In each of the sections, they are then further broken down.
The first section on the balance sheet is Assets. An asset is a good to which you must have ownership, and it must hold a value, either current value or future value. Assets that are considered to be current or have current value are those that can be converted into cash within one year. Therefore, cash is considered a current asset as well. These are also known as "liquid assets" due to how fast they can be converted. One of the items that one may find under the "current asset" section is Marketable Securities. These are short-term investments that a company may make. They are considered to be liquid because generally they mature in less than one year. Another item you will see is Receivables or Accounts Receivable. This is the money you expect to receive from a customer for performing a certain service or providing a good. Inventory is also a current asset because if needed, a company could sell its inventory for cash. To conclude this section is the Prepaid Assets. These are the goods or services the company has already paid for. An example of this could be paying a year's lease for a building or for insurance all in one lump sum. After establishing the value for each line item, total them up on the line labeled "Total Current Assets". The next subcategory under assets is Long-Term Investments. These assets take over one year to turn into cash. Included in these are Bonds, Mutual funds, and Pension funds. Although one might think that these would fall under "marketable securities," they are slightly different. Most of the time these assets have maturity lengths that are over one year; in some cases there are exceptions to this rule. After you have found the value of each line item, you would total them up under "Total Long-Term Investments" just like we did in the last section. The next subcategory is Plant, Property, and Equipment. This section can be a little trickier than the others because it also involves depreciation, or the declining in the value of an asset. Under this you will find the Land, Building, Machinery and Automobiles a company owns. All of these items depreciate over time except land. When entering an asset that is depreciable, directly under it, you will have to add another line that reads "Less: Accumulated Depreciation." Each of these items will have a different depreciation rate that you will need to first calculate. Next, you will subtract that value from the original price of the good. For example: if your building cost $200,000 and your accumulated depreciation was $50,000, you would subtract the $50,000 from the $200,000, which would give the building a total value of $150,000. After finding the new value of these items, you will total them up under "Total PPL." The last types of Assets are called Intangible Assets. These are defined as the assets that cannot be touched or seen. They also include copyrights, patents, service marks, or trademarks. You will find the value of each item listed if the company has them, and then total them up under the line "Total Intangible Assets." Since each asset is now accounted for, the next step is to take the total from each subcategory and add them up to get a new value for the line "Total Assets."
The next section on your balance sheet is Liabilities. This is not as time consuming like "Assets" are, due to the fact that there are only two subcategories. First, a liability is basically a financial obligation that a company has. The first subcategory will be "Current Liabilities." These are the debts that must be paid in less than one year. Below this you will find the accounts payable, taxes payable, and wages payable. Depending on your company, you may also find current portions of mortgage payable. In accounts payable, you will find the total amount of money owed for multiple goods or services. For example: you might see electric bills or phone bills. We can apply the same steps as we took for "Assets" and total up the amount of these line items and enter them under "Total Current Liabilities." The next and final subcategory of Liabilities is "Long-Term Liabilities." These are the liabilities that will have benefit over one year. Beneath these, you might find items like loans payable, bonds payable, or mortgage payable. Next add all of these up and enter them under "Total Long-Term Liabilities." The last step is to add up the totals from "current liabilities" and "total long term liabilities," and enter them on the line titled "Total Liabilities."
The last section of your balance sheet is called "Owners Equity." This section is the least complicated, and involves very simple math. The first step is to figure out the "owner's equity." In order to attain these numbers, you will need to manipulate the accounting equation to look like this: Total Assets Total Liabilities = Owner's Equity. For example: Imagine there are $200,000 in Total Assets and $175,000 in Total Liabilities. The next course of action is to plug in the numbers to get the "Owners Equity": $200,000 - $175,000 = $25,000. Now that you have value for "owner's equity," we can find the next and final line item "Total Liabilities and Owners Equity". To find this value, just add up the two line totals. If done correct it will equal the amount of "Total Assets". Let us try it using the same numbers used before, $175,000 +$25,000 = $200,000. As anticipated, everything added up correctly and balanced. Congratulations! You have successfully completed a basic balance sheet using two variations of the Accounting Equation.
