Balance Sheet: Purpose, How to Read, Examples (2023)

A clear snapshot of your business’s financial performance can help you secure fundingobtain loans, and, for so many reasons, reduce headaches.

For that, your balance sheet is crucial. After all, scrambling through piles of receipts or scrolling for emails is stressful with a deadline looming or an auditor watching over you. You don’t want to miss an opportunity for an acquisition, investment, or loan because your financial records are unorganized or unbalanced.

If you’re in a time crunch to create a balance sheet, don’t worry. We’ll walk you through all the important steps, share balance sheet examples, and show you the balance sheet format to follow so you can get your financial records up to date—fast.

What is a balance sheet?

A balance sheet is a financial statement that shows a business’s assets, liabilities, and stockholder equity, and is shared either on a monthly or quarterly basis. The main benefit of a balance sheet is to know what a business is worth.

Importance of balance sheets

A balance sheet can help you obtain a loan, establish a value for your business, and keep financial records organized for tax agencies.

1. Obtain credit/debt from a lender

When a lender or bank is deciding whether to provide credit to a business, a balance sheet helps them estimate risk. Lenders typically look at liabilities to ensure a business isn’t overextending itself financially—lenders want to make their money back. If existing debts (i.e., liabilities) are much higher than assets, a lender may hesitate to extend further credit.

While lenders may look at your income statement to assess profitability (i.e., do you have more revenue than expenses), a balance sheet helps identify assets such as real estate, machinery, and inventory that could be used to recoup their money if you’re unable to pay back the loan.

Alternatively, Shopify store owners can obtain cash advances and loans through Shopify Capital. In lieu of a balance sheet, Shopify uses data from previous sales to see how much money the merchant is qualified to borrow. Shopify then takes a percentage of the merchant’s future sales to pay back the loan.

2. To set a business valuation

If someone is looking to acquire your business, they’ll request a balance sheet to help understand your financial position.

Other aspects involved in setting a business valuation include the size of your customer base relative to the industry, competitive advantages, the employees and executives of your company (particularly during “acquihire” valuations), year-over-year growth, and revenue and profit.

3. Detail a business’s financial position over time

A balance sheet can help you understand whether your business has more assets or liabilities at a moment in time.

Over the years, your balance sheet will also include historical data, which can help you—or your lenders or your investors—evaluate your financial strengths and weaknesses, and how they’ve changed over time.

Components of the balance sheet

Small businesses may list only a handful of the items below. As with most financial documents, complexity scales with your business. Starting with a balance sheet template can make things easier.

1. Assets

An asset is an item of economic value that a company owns. Most assets are tangible assets, but there are also intangible assets.

New businesses typically have assets such as inventory, cash, equipment, or machinery—all tangible—and, in some cases, intangible assets like patents or trademarks. Enterprise assets may also include things like investments, accounts receivable, land, transportation, logosbrand recognition, and marketing assets, such as an email list or social media account.

The balance sheet equation for assets is:

Liabilities + Stockholder equity = Assets

There are two types of assets on a balance sheet:

  • Current assets
  • Non-current assets

Current assets are short-term resources, typically convertible into cash or used up within a year. Examples include:

  • Cash and cash equivalents
  • Accounts receivable
  • Inventory
  • Marketable securities
  • Prepaid expenses

Non-current, or long-term assets, are investments that are not expected to be converted into cash or used up within a year. Examples include:

  • Property, plant, and equipment (PPE)
  • Long-term investments
  • Intangible assets (patents, copyrights, etc.)
  • Goodwill

2. Liabilities

A company’s liabilities refers to the debt it owes. It costs the business money over time and decreases the value of the business.

For example, if you’ve invested your own money in a business, that’s called a shareholder loan. A shareholder loan is a debt that the business owes you, the shareholder. Many new businesses typically have liabilities, such as credit card debt and shareholder loans.

Enterprise-level businesses may have liabilities like accounts payable, lease contracts, payroll, bank loans, and deferred taxes.

There are also current and non-current liabilities.

Current liabilities are short-term obligations due within one year. Examples include:

  • Accounts payable
  • Short-term debt
  • Accrued expenses
  • Unearned revenue
  • Current portion of long-term debt

Non-current, or long term liabilities, are obligations that extend beyond one year. Examples include:

  • Long-term debt
  • Deferred tax liabilities
  • Pension liabilities
  • Lease liabilities

3. Shareholders equity

Stockholder (or shareholder) equity is the value of the business after all debts and liabilities have been settled. It will always equal assets minus liabilities. 

The accounting equation to calculate shareholder’s equity is:

Total net assets – Total liabilities = Stockholder’s equity

The terms “stockholder equity,” “shareholder equity,” and “owner’s equity” essentially mean the same thing. Stockholder or shareholder equity is typically the term assigned to corporations, whereas owner’s equity is reserved for sole proprietorships.

For example, if you have $20,000 in assets and $10,000 in liabilities, then you have $10,000 in stockholder equity. As your company’s total assets grow and liabilities shrink, you’ll have more stockholder equity.

In the early stages, it’s normal to have a negative balance in stockholder equity—liabilities (i.e., your startup costs) are higher than your assets. You may invest $50,000 in your business before you ever launch to the public. You could be in the early stages of buying product inventory, building an app, or designing a website. However, you have no assets and no cash.

Examples include: 

  • Equity capital
  • Retained earnings
  • Common stock
  • Treasury stock

Balance sheet example

Several key stakeholders could request a balance sheet from you. For example, your local tax agency might randomly select your business for an audit. A balance sheet with a list of assets and liabilities can help an auditor get a clear picture of your business’s financial position.

Here’s what those assets and liabilities might look like for a new business:

balance sheet example

Download your free balance sheet template

Simply make a copy of our balance sheet template to get yours now. 

You can use this Google Sheet to enter the numbers for your company and get a better idea of how a balance sheet works. It also includes other financial statements, like an income statement and cash flow statement to improve your bookkeeping as a business owner.

free balance sheet template

How to create a balance sheet in a spreadsheet

  1. Set a regular timeframe 
  2. Create a balance sheet format
  3. Set a value for intangible assets

1. Set a regular timeframe

Large enterprises are likely to update their balance sheets on a daily basis, whereas smaller businesses typically update their balance sheets every month.

2. Create a balance sheet format

You can find balance sheet formats and templates with a quick Google search. Here’s one from Microsoft and another in Google Docs. You can also use small business accounting software to auto-create a quick PDF balance sheet based on numbers you input, credit card information, and bank account information.

Typically, assets are listed first, then liabilities, and, finally, shareholder’s equity. In the early stages of your business, you might not have many assets. It’s perfectly fine to include $0 for certain lines if that’s true for you.

3. Set a value for intangible assets

Typically, people hire a legal team to assess and calculate the value of intangible assets. However, other methods can estimate the value of an intangible asset.

In a market approach, you determine the market value of an intangible asset by comparing it to the value of the same asset sold by a comparable business. For example, if your business has a patent for a production process, and a similar business recently sold its patent for $67,000, you would value your patent at $67,000.

Not every intangible asset needs a value. For example, if you used an external designer to develop your logo, you could use a market approach to help determine what your logo might sell for in an open market. On the other hand, if your logo is simple text, it may not reach a threshold of creativity to be protected and, therefore, saleable.

How to read a balance sheet

When reading a balance sheet, a higher stockholder equity is better. It means your assets are higher than your liabilities. 

Balance sheets are used primarily to assess equity in a specific moment, but you can also compare year-over-year changes to assets and liabilities to see how your business value has changed over time—and why.

For example, in 2021, say a business’ assets increased by $15,000, from $235,000 to $250,000. Also in 2021, the same business paid off a loan, reducing its liabilities by $20,000, from $70,000 down to $50,000. 

Previously, the stakeholder equity would’ve been $165,000 ($235,000 less $70,000). The new equity would be $200,000, an increase of $35,000—helped by a growth in assets and a reduction in liabilities.

That kind of increase would make your business a more attractive candidate for a loan or investment. But it may take time to get there. Even if you’re a new company and your balance sheet is in the red for stockholder equity, you need to know where you stand. It’s your best chance to get into the black—and stay there.

Analyzing a balance sheet involves assessing a company’s financial health using various ratios and metrics. Some of the key financial ratios include:

  • Current ratio: Current assets / Current liabilities
  • Quick ratio: (Current assets – Inventory) / Current liabilities
  • Debt-to-equity ratio: Total liabilities / Shareholders’ equity
  • Return on equity: Net Income / Shareholders’ equity
  • Asset turnover ratio: Net sales / Average total assets

These ratios help evaluate a company’s liquidity, solvency, and efficiency. For a detailed understanding, compare these ratios with industry benchmarks or historical data to identify trends and potential risks.

Limitations

There are some limitations to be aware of when analyzing a balance sheet:

  • Historical cost: Balance sheets report assets at their historical cost, which may not represent their current market value. This can lead to an over- or underestimation of your company’s financial position.
  • Depreciation: Depreciation is the process of allocating the cost of a tangible asset over its useful life. While depreciation attempts to account for the wear and tear of assets over time, it’s based on estimates and may not accurately reflect the actual decline in the asset’s value. 
  • Intangible assets: Intangible assets, such as goodwill and intellectual property, can be difficult to value accurately. Their value on the balance sheet may not reflect their true worth to the company.
  • Off-balance-sheet items: Some financial transactions, such as operating leases and certain derivatives, may not appear on the balance sheet. This can lead to an incomplete understanding of your company’s balance sheet, as off-balance-sheet items can impact a company’s financial health and risk profile.
  • Static snapshot: The balance sheet provides a snapshot of a company’s financial position at a specific point in time. While it can reveal essential information about the company’s assets, liabilities, and equity, it doesn’t provide insights into the company’s performance over time. 

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Balance sheet FAQ

What are the 3 main things found on a balance sheet?

  • Assets: All the resources a company owns, such as cash, accounts receivable, inventory, and fixed assets.
  • Liabilities: All the money the company owes to others, such as accounts payable, loans, and accrued expenses.
  • Equity: The difference between assets and liabilities. It represents the net worth of the company.

What is the purpose of a balance sheet?

A balance sheet shows a company’s assets, liabilities, and owner equity. It’s a statement of financial position that allows you to assess a company’s financial health, liquidity, and stability, which is crucial for making informed decisions.

What does the balance sheet tell us?

The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It shows the company’s assets, liabilities, and equity, illustrating the resources it has available, working capital, the financial obligations it must fulfill, and the net worth or residual interest of its owners.

What are the 3 types of balance sheets?

  • Comparative balance sheets
  • Vertical balance sheets
  • Horizontal balance sheets

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