How to Make Balance Sheet? – Stepwise Process with Example

Tally Solutions |Updated on: September 13, 2022

• Balance sheet definition
• How to prepare balance sheet?
• Step to prepare balance sheet
• Importance of balance sheet
• What is the formula for balance sheet?
• Balance Sheet prepared by modern day business

Balance Sheet Definition

Balance Sheet is one of topmost financial statement prepared by the businesses. The financial details of the balance sheet help you and the external stakeholders to evaluate the financial performance of the business on a given date. Before knowing the steps to prepare a balance sheet and reading the balance sheet, it is important to be familiar with the components and format of the balance sheet.

Knowing the balance sheet format, equations, components will help you to prepare a balance sheet easily. More importantly, knowing the fundaments will make you read the balance sheet without any complications.

Click here to know the balance sheet format, balance sheet equations and balance sheet components

Once you have through understandings of balance sheet basics, you can start preparing the balance sheet.

How to prepare balance sheet?

Just like every other report, the source for you to prepare a balance sheet is from the transactions accounted in your books of accounts. In the process of preparing the balance sheet, you need to prepare other financial statements which will help you gather the accounting data. Let’s start with a step-by-step process to prepare the balance sheet.

Steps to prepare balance sheet

As mention in the above illustration, you need to follow 4 steps to complete the balance sheet. The steps are listed and explained below:

• Preparing ledger account
• Creating trial balance
• Preparing trading and profit & loss account
• Preparing balance sheet

Step- 1: Prepare ledger accounts

From the transaction you have accounted in the journal book (a book where day to day transactions are recorded), you must prepare an account statement for each ledger to determine the closing balance. This is because a ledger account may have several transactions and there is no way that journal book will tell you the current balance of each account.

Here, preparing ledger account is nothing but posting all the debit and credit transaction into a statement belonging to a ledger account. For example, in preparing cash ledger account, you must post all debit (receipts) and credit (payments) into statement and difference between these two including the opening balance of cash will be the closing balance.

Step-2: Create trial balance

Trial balance is a summary of all the ledger accounts. It lists all ledger accounts with closing balance posted from individual ledger accounts statement (discussed above). The format of trial balance consists of the Debit column and Credit column in which the closing balance of each ledger accounts will be posted.

As a thumb rule, the total of debit balance in trial balance should match the total of credit balance. Only when it matches, it is assumed that the posting and ledger accounts are arithmetically correct. The purpose of preparing trial balance is to ascertain whether recording and posting of ledger accounts are correct. It’s the first statement in the process of preparing a balance sheet and hence, it always preferred to do a trial check whether every debit is equal to the credit.

Step- 3: Preparing trading and profit & loss account

Profit and loss accounts is a financial statement prepared to know the profitability of the business. This consists of 2 sections namely Trading account and profit & loss account. Most businesses combine these two in a single statement and few, especially into manufacturing segment prefer to prepare separately.

Trading Account reflects the result of buying and selling of goods including the direct cost associated with it. It shows the gross loss or gross profit without considering the operational expenses and incomes. On the other side, profit & loss account shows you the net profit considering the gross profit/loss and all the indirect expenses and income.

Trading and Profit & loss account consists of all the ledger accounts having a nature of the purchase, sales, direct expense and income, indirect expenses and income. While preparing Trading and profit & loss account, you need to post only the ledgers belong to above nature.

Step-4 : Prepare balance sheet

Now that you have prepared all the above statements, it’s time to prepare a balance sheet. You need to consider all the ledgers which are non-revenue in nature. In other words, all the ledgers except the one which you have already considered for the Trading and Profit & loss account should be considered for the balance sheet.

Don’t stress yourself! Find out Balance Sheet format and nature of accounts to be considered for Balance Sheet

Broadly, the balance sheet consists of assets and liabilities. In the process of preparing a balance sheet, first, start with the assets side. Start capturing fixed assets ledgers like land and buildings, furniture, etc., and then investments and all the current assets like cash, Bank, Accounts receivables, Closing stock, etc.

Next step is to bring all the ledgers having nature of liability under the liabilities side of the balance sheet. Remember, if there is any adjustment like depreciation, bad debts, etc. you can do it in the balance sheet as well.

Once you have captured all details into the balance sheet, the assets side should be equal to the liabilities side of the balance sheet. Only then, your balance sheet is arithmetically correct.

Importance of Balance Sheet

A balance sheet, essentially helps businesses get an overview of their financial health and understand how much money the venture would have left over if it sold its assets and paid off its debts.

What is the formula for balance sheet?

The formula for balance sheet is: Assets = Liabilities + Equity

Balance sheet prepared by modern day business

Traditionally, the balance sheet was prepared after the closure of the financial year. But with the modern-day business requirements, the balance sheet is looked upon as one of the key financial statements for decision making. As a reason, it’s prepared quarterly/monthly or even monthly. Preparing a balance sheet is not an easy task. It requires a lot of time and effort in preparing the accounting data. To ease this, most businesses are using accounting software that automatically generates the balance sheet along with various other financial statements.

3 balance sheet components

The three components of the balance sheet are assets, liabilities, and owner’s equity (or shareholder)

Assets

Assets are those things that can be assigned a value and be quickly turned into cash by a business, either in the short term or the long term. When assets are shown on a balance sheet, they are shown in terms of liquidity. The higher the liquidity, the higher up in the list the particular asset will be shown on the balance sheet. This means the cash and bank accounts are listed first, after which fixed assets are listed. Then the intangible assets are listed, followed by the other assets that a business owns and can turn into cash.

The items that can be turned into cash within a year come under current assets. These include accounts receivable, short-term deposits, and cash and cash equivalents. Property, plant, and equipment particulars will also be on the assets side of the balance sheet, and they include land, buildings, and equipment. Intangible assets, including intellectual property, copyright, patents, trade names, and so on will come next on the balance sheet.

Liabilities

This section of the balance sheet is about the debts and obligations of your business. The current liabilities are due within a year and include unearned revenue, notes payable, interest payable, and tax payable. Next, you will list the long-term liabilities that need to be paid after one year. The long-term liabilities include bonds payable, mortgage payments, and so on. When preparing a balance sheet, the current liabilities are listed first and followed by long-term liabilities.

Owner’s Equity

The owner’s equity is what money is being held by your business. In the case of a sole proprietorship, the category is called owner’s equity. When it is corporations, the category is titled either shareholder’s equity or stockholder’s equity. Let us say hypothetically that you have liquidated all your assets and cleared all the debts. The remaining money will be the equity that must be handed over to the business owner. 

The owner’s equity is total assets subtracted by total liabilities. When the value is negative, it means liabilities exceed the assets, and when it is positive, it means the business can pay off the liabilities with the assets it currently owns. When you are preparing the balance sheet, the owner’s equity will come below the liabilities. The most common owner’s equity accounts are treasury stock, stock, retained earnings, and additional paid-in capital.

Balance Sheet Example

The balance sheet will have the particulars of assets and liabilities. It will look like the below.

FAQ:

What is the balance sheet formula?

Assets = Liabilities + Equity.

What is balance sheet for beginners? 

Balance sheet is a financial statement that helps beginners to know the assets that business owns and the debt that businesses owes, and the amount that they have and others that owes to the business.  

Watch this Video on How to View and Analyse Balance Sheet in TallyPrime

Read More on Balance Sheet

What is Balance Sheet, Components of Balance Sheet, Format of Balance Sheet, Consolidated Balance Sheet, Common Size Balance Sheet