Have you found yourself in the position of needing to prepare a balance sheet? Here’s what you need to know to understand how balance sheets work and what makes them a business fundamental, as well as general steps you can take to create a basic balance sheet for your organization.
WHAT IS A BALANCE SHEET?
A balance sheet is a financial statement that communicates the so-called “book value” of an organization, as calculated by subtracting all of the company’s liabilities and shareholder equity from its total assets.
A balance sheet offers internal and external analysts a snapshot of how a company is currently performing, how it performed in the past, and how it expects to perform in the immediate future. This makes balance sheets an essential tool for individual and institutional investors, as well as key stakeholders within an organization and any outside regulators.
Most balance sheets are arranged according to this equation:
Assets = Liabilities + Shareholders’ Equity
You can find information about assets, liabilities, and shareholder equity on a company’s balance sheet. The assets should always equal the liabilities and shareholder equity.
This means that the balance sheet should always balance, hence the name. If they don’t balance, there may be some problems, including incorrect or misplaced data, inventory and/or exchange rate errors, or miscalculations.
Each category consists of several smaller accounts that break down the specifics of a company’s finances.
These accounts vary widely by industry, and the same terms can have different implications depending on the nature of the business. But there are a few common components that investors are likely to come across.
How the Balance Sheet is Structured
Cash and Equivalents
The most liquid of all assets, cash, appears on the first line of the balance sheet. Cash Equivalents are also lumped under this line item and include assets that have short-term maturities under three months or assets that the company can liquidate on short notice, such as marketable securities. Companies will generally disclose what equivalents it includes in the footnotes to the balance sheet.
This account includes the balance of all sales revenue still on credit, net of any allowances for doubtful accounts (which generates a bad debt expense). As companies recover accounts receivables, this account decreases, and cash increases by the same amount.
Inventory includes amounts for raw materials, work-in-progress goods, and finished goods. The company uses this account when it reports sales of goods, generally under the cost of goods sold in the income statement.
Plant, Property, and Equipment (PP&E)
Property, Plant, and Equipment (also known as PP&E) capture the company’s tangible fixed assets. The line item is a noted net of accumulated depreciation. Some companies will class out their PP&E by the different types of assets, such as Land, buildings, and various types of Equipment. All PP&E is depreciable except for Land.
This line item includes all of the company’s intangible fixed assets, which may or may not be identifiable. Identifiable intangible assets include patents, licenses, and secret formulas. Unidentifiable intangible assets include brand and goodwill.
Next, come to your liabilities—your business’s financial obligations and debts.
List your liabilities by their due date. Just like assets, you’ll classify them as current liabilities (due within a year) and non-current liabilities (the due date is more than a year away). These are also known as short-term liabilities and long-term liabilities.
Your current liabilities might include:
- Accounts payable (what you owe suppliers for items you bought on credit)
- Wages you owe to employees for hours they’ve already worked
- Loans that you have to pay back within a year
- Taxes owed
- Credit card debt
And here are some non-current liabilities:
- Loans that you don’t have to pay back within a year
- Bonds your company has issued
Returning to our catering example, let’s say you haven’t yet paid the latest invoice from your tofu supplier. You also have a business loan, which isn’t due for another 18 months.
Equity / capital
The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders’ equity. It comprises:
- Issued capital and reserves attributable to equity holders of the parent company (controlling interest)
- Non-controlling interest in equity
Formally, shareholders’ equity is part of the company’s liabilities: they are funds “owing” to shareholders (after payment of all other liabilities); usually, however, “liabilities” are used in the more restrictive sense of liabilities excluding shareholders’ equity.
The balance of assets and liabilities (including shareholders’ equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping.
In this sense, shareholders’ equity by construction must equal assets minus liabilities, and thus the shareholders’ equity is considered to be a residual.
Regarding the items in the equity section, the following disclosures are required:
- Numbers of shares authorized, issued and fully paid, and issued but not fully paid
- Par value of shares
- Reconciliation of shares outstanding at the beginning and the end of the period
- Description of rights, preferences, and restrictions of shares
- Treasury shares, including shares held by subsidiaries and associates
- Shares reserved for issuance under options and contracts
- A description of the nature and purpose of each reserve within owners’ equity
Statement of Financial Position ( Format )
Consolidated Statement of Finance Position of XYZ, Ltd.
As of 31 December 2025
Non-Current Assets (Fixed Assets)
Property, Plant, and Equipment (PPE)
Less: Accumulated Depreciation
Intangible Assets (Patent, Copyright, Trademark, etc.)
Less: Accumulated Amortization
Investments in Financial assets due after one year
Investments in Associates and Joint Ventures
Other Non-Current Assets, e.g. Deferred Tax Assets, Lease Receivable, and Receivables due after one year
Investments in Financial assets due within one year
Non-Current and Current Assets Held for sale
Accounts Receivable (Debtors) due within one year
Less: Allowances for Doubtful debts
Cash and Cash Equivalents
TOTAL ASSETS (this will match/balance the total for Liabilities and Equity below)
LIABILITIES and EQUITY
Current Liabilities (Creditors: amounts falling due within one year)
Current Income Tax Payable
Current portion of Loans Payable
Other Current Liabilities, e.g. Deferred income, Security deposits
Non-Current Liabilities (Creditors: amounts falling due after more than one year)
Issued Debt Securities, e.g. Notes/Bonds Payable
Deferred Tax Liabilities
Provisions, e.g. Pension Obligations
Other Non-Current Liabilities, e.g. Lease Obligations
Share Capital (Ordinary Shares, Preference Shares)
Less: Treasury Shares
Other Accumulated Reserves
Accumulated Other Comprehensive Income
TOTAL LIABILITIES and EQUITY (this will match/balance the total for Assets above)