How To Create a Balance Sheet: Required Sections and Formats

By Indeed Editorial Team

Updated March 12, 2021 | Published February 4, 2020

Updated March 12, 2021

Published February 4, 2020

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Balance sheets are valuable financial statements that provide insight into a company's financial health. Though extremely useful for business owners, their utility extends to potential creditors and investors. In this article, we'll explore why balance sheets are important, what they should include and how they should be formatted.

Related: What is Strategic Planning? Definition, Techniques and Examples

Why are balance sheets important?

A balance sheet, often referred to as a "statement of financial position," is one of the three major financial statements used by companies, the other two being the cash flow statement and the income statement.

Balance sheets provide the financial standing of a company at a given date by detailing the business's assets (what the company owns), liabilities (what the company owes) and owner's equity (the money that is left for the owners). These financial statements can be prepared at any point however, they are typically put together at the end of accounting periods. These reporting periods vary depending on the needs and preferences of the company, but they usually take place once a month, quarter or year.

A company's balance sheet shows every transaction that has occurred since the company was started. This reveals a lot about a business's comprehensive financial health. It also allows business owners to compare current balance sheets to previous ones, giving them an idea of the changes that their finances have undergone over time. Also, it allows companies to gauge their ability to satisfy debts and make upcoming payments by using this equation:

Current assets / Current liabilities = Current Ratio

Other than the usefulness for business owners, balance sheets also provide valuable information to creditors and investors that they then use to predict the future performance and profitability of a company. These external parties use the balance sheet to evaluate a company's solvency, liquidity and capital structure.

Related: Operations Management: Everything You Need To Know

What to include in balance sheets

A balance sheet is divided into three major sections:

  • Assets

  • Liabilities

  • Owner's equity

Assets

Assets, also known as "resources" or things that the company owns that have a monetary value, are detailed in this section. Similar assets are grouped together on balance sheets. The most popular way to do this is by dividing the assets into current and non-current categories. Generally, assets are listed in order of liquidity, or how easily they can be converted to cash, with the current assets being listed first.

Current assets are things that will be consumed or used within a short time period, typically within a year. Some examples of current assets are:

  • Account receivables (money that customers owe the company)

  • Cash equivalents (bonds, stocks and currency)

  • Prepaid expenses

  • Inventory

  • Cash (funds in a checking account)

  • Money in-transit (funds that are being transferred between accounts)

  • Short-term investments

  • Prepaid expenses

  • Advance payments

Non-current assets are items that provide benefits for an extended period of time, typically for more than a year. Some examples of non-current assets are:

  • Intangible assets (things like goodwill, trademarks and patents)

  • Long-term investments

  • Equipment and machinery

  • Building and land

Liabilities

Liabilities, or obligations to external sources, are listed next. In other words, this section details what the company owes others. Just like the assets section, liabilities are divided into current and non-current groupings. Within this section, the liabilities are listed by their due date, with the current assets being listed first.

Current liabilities refer to the obligations that the company expects to satisfy within a year. These obligations are typically met by using either the provision of services or goods or by utilizing the company's current assets. Some examples of current liabilities are:

  • Annual taxes

  • Loans that must be repaid within a year

  • Employee wages

  • Accounts payable (the amount owed to suppliers for items purchased on credit)

Non-current liabilities have a due date that is over a year away. Some examples of non-current liabilities are:

  • Company-issued bonds

  • Loans that can be repaid in the future (past a year)

Owner's equity

Owner's equity, also referred to as "stockholder's equity" when used in corporations rather than sole-proprietorships, is the last section on a company's balance sheet. Equity is a term that refers to the amount of money that a company possesses. Owner's equity represents the number of funds that belong to the owners of the company. A company's equity can fluctuate when money is drawn out to pay the owners.

Some examples of owner's equity are:

  • Retained earnings (the total expenses subtracted from the total revenue)

  • Public or private stock

  • Capital (funds that the owners invested into the company)

Related: Learn About Being an Accountant

The balance sheet equation

The balance sheet is true to its name. It is used to ensure that a company's assets are equal to its liabilities and equity. This is because the assets are paid for by either increasing liabilities (borrowing money) or obtaining owner equity (the owners paying). Here is the equation used to determine the company's financial standing on a balance sheet:

Liabilities + Owner's Equity = Assets

Why are balance sheet formats important?

Though the information found in all balance sheets is the same, the balance sheet format determines the layout of a company's accounting information. Choosing the correct format for your company is really dependent on how you would like to view the information. In other words, which format aids in your understanding of the line items and how they relate to one another.

Related: Learn About Being a Financial Planner

Types of balance sheet formats

Three major formats are used to present the information found in a balance sheet:

Account format

The account format divides the balance sheet into two columns, with the assets listed on the left side and the liabilities as well as the owner's equity detailed on the right side. When everything is accounted for, the totals of both sides should be equal.

Report format

This format uses a single, vertical column, where assets are shown first, followed by the company's liabilities and then the equity. This is typically the style that businesses choose to use when formatting their balance sheets.

Financial position format

Though rarely used in the United States, the financial position format is widely used in international markets such as Europe. In this format, the equity section is replaced by two line items:

  • Working capital: This is calculated by subtracting a company's current assets from its current liabilities. It is used to check whether a company has the funds to pay its bills.

  • Net assets: This is the same calculation as the total equity found in both the account and report formats. It refers to the difference between a company's total assets and its liabilities.

Examples of balance sheet formats

Here are examples of the two most popular balance sheet formats:

Account format

Balance Sheet
Assets Liabilities & stockholders' equity
Current assets Liabilities
Cash $85,000 Notes payable $4,000
Accounts receivable $4,400 Accounts payable $2,600
Prepaid building rent $1,800 Salaries payable $2,000
Insurance $3,600 Income tax payable $4,000
Supplies $800 Unearned service revenue $3,400
Total current assets $95,600 Total liabilities $16,000
Non-current assets Stockholder's equity
Equipment $9,000 Capital stock $50,000
Acc. dep -Equipment $3,600 $5,400 Retained earnings $35,000 $85,000
Total assets $101,000 Total liabilities & stockholders' equity $101,000

Report format

Balance Sheet
Assets
Current assets
Cash $85,000
Accounts receivable $4,400
Prepaid building rent $1,800
Insurance $3,600
Supplies $800
Total current assets $95,600
Non-current assets
Equipment $9,000
Acc. dep -Equipment $3,600 $5,400
Total assets $101,000
Liabilities & stockholders' equity
Liabilities
Notes payable $4,000
Accounts payable $2,600
Salaries payable $2,000
Income tax payable $4,000
Unearned service revenue $3,400
Total liabilities $16,000
Stockholder's equity
Capital stock $50,000
Retained earnings $35,000 $85,000
Total liabilities & stockholders' equity $101,000

Explore more articles