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What is a Balance Sheet for Small Businesses or Startups?

There are three main financial statements: Balance Sheet, Income Statement, and Cash Flow Statement. These are the heart of a small business finance track performance. Financial statements give you a clear view of how your business is doing regarding income vs. expenses. Not knowing your financial situation is dangerous for the well-being of the company. Therefore, your financial statements are the clue to help you succeed and have a long-lasting business. 

It helps you diminish the expenses and increase the profit.  

A balance sheet is a part of the financial section of your business plan. It helps you to track the financial health of your company. The balance sheet encapsulates the assets, liability, and equity of the shareholders. It shows the financial position of a business in a particular time; quarters or fiscal year are the most common. The balance sheet can also be called the statement of financial position. The assets in the balance sheet must equal the sum of liabilities and equity.    

Assets

It refers to all the goods your company owns that can be converted into cash and gives more value to the company, for example, real estate, cash, or investments. In the balance sheets, assets are divided into two: 

  • Current: this type of assets can be turned into cash faster, for example, inventory, investments 
  • Noncurrent: this type of assets cannot be turned into cash fast, for example, real state, equipment, land, patents, trademarks, logos   

Assets = Liabilities + Equity

Liabilities

It refers to the business responsibilities, debts, or obligations, for example, loans and account payables. Liabilities are divided into two:

  • Current: this type of liability can be paid fast, for example, account payables, credit cards, taxes, invoices
  • Noncurrent: are liabilities that take longer to pay, for example, long term loans, long term leases

Equity

 It refers to the value an owner has on a business based on its assets. The best way to find out the equity a small business owner has is by adding all the assets and subtracting the liabilities.

Equity = Assets – Liabilities

Does a Balance Sheet Always Balance?

The name says it, so it must balance.  If the numbers are not equal to the assets after adding the liabilities and the shareholders’ equities, then there is a miscalculation somewhere.

To address the imbalance, it is important to verify and review the following potential causes:

  1. Partial or misplaced data: Ensure all relevant data and information are included and accounted for on the balance sheet.

  2. Wrongly entered transactions: Double-check the accuracy of the recorded transactions to ensure they are correctly entered and categorized.

  3. Errors in currency exchange rates: If dealing with multiple currencies, ensure that the exchange rates used for conversions are accurate and up-to-date.

  4. Inventory errors: Verify the inventory values and ensure they are correctly recorded and valued based on appropriate accounting methods.

  5. Miscalculated equity calculations: Review the calculations for equity components such as share capital, retained earnings, and additional paid-in capital to ensure accuracy.

  6. Miscalculated loan amortization or depreciation: Check the calculations for loan amortization or depreciation of assets to ensure proper calculations are applied.

By identifying and rectifying any errors or miscalculations, the balance sheet can be adjusted to ensure it reflects the accurate financial position of the business.

How do you prepare a Balance Sheet?

Preparing a balance sheet is a crucial part of assessing the financial health of a small business or startup. It provides valuable insights into the company’s assets, liabilities, and shareholders’ equity. By following a systematic approach, you can ensure accurate financial reporting and gain a comprehensive view of your business’s financial position.  

Step 1: Decide the Reporting Date and Period To begin, determine the specific reporting date and period for your balance sheet. While quarterly reporting is commonly used, the frequency can vary based on your business type and requirements. For quarterly reporting, the dates typically align with the last day of each quarter:

  • Q1: March 31
  • Q2: June 30
  • Q3: September 30
  • Q4: December 31 Note: Annual reporting often uses December 31 as the reporting date.

Step 2: Identify Your Assets Create a record of your assets using a specialized accounting program or a spreadsheet. Categorize your assets into current and non-current: Current Assets:

  • Cash and cash equivalents
  • Short-term marketable securities
  • Accounts receivable
  • Inventory
  • Other current assets Non-Current Assets:
  • Long-term marketable securities
  • Property
  • Goodwill
  • Intangible assets
  • Other non-current assets Total your current assets separately from your non-current assets, and then calculate the sum of both categories.

Step 3: Identify Your Liabilities Similar to the previous step, maintain a record of your liabilities using accounting software or a spreadsheet. Classify your liabilities into current and non-current: Current Liabilities:

  • Accounts payable
  • Accrued expenses
  • Deferred revenue
  • Current portion of long-term debt
  • Other current liabilities Non-Current Liabilities:
  • Deferred revenue (non-current)
  • Long-term lease obligations
  • Long-term debt
  • Other non-current liabilities Total your current liabilities and non-current liabilities separately, and then combine both totals.

Step 4: Calculate Shareholders’ Equity Calculating shareholders’ equity can vary depending on the ownership structure of your business. For a single-owner business, it is relatively straightforward. However, for publicly held companies, the calculation may involve various types of stocks issued, such as common stock, preferred stock, treasury stock, and retained earnings.

Step 5: Add Total Liabilities to Total Shareholders’ Equity and Compare to Assets The final step is to add the total liabilities to the total shareholders’ equity. The resulting sum should be equal to the total assets listed on your balance sheet. This ensures that the balance sheet is balanced and accurately represents your business’s financial position.

Conclusion: Preparing a balance sheet for your small business or startup is an essential task that provides insights into your financial performance. By following these step-by-step guidelines, you can ensure accurate reporting and gain a comprehensive understanding of your business’s assets, liabilities, and shareholders’ equity. Remember to consult accounting professionals or refer to accounting standards specific to your industry for more detailed guidance.

Small Business Balance Sheet Example

Take a look at the small business balance sheet example below. Notice that the total assets at the bottom of the statement are equal to the total liabilities and equity.

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