How to prepare balance sheet

April 6, 2010

Prepare balance sheet from trial balance in five easy steps. Format and elements of classified balance sheet.

1. Reasons companies prepare balance sheet

A balance sheet is a picture of a company's financial position as of a point in time. A balance sheet can be prepared as of any date, but it's usually prepared as of month, quarter or year-end.

A balance sheet is a very valuable statement that provides information about financial health of a company. Things like cash, accounts receivable, accounts payable, net worth, etc. can be determined by looking at a balance sheet.

There are multiple good reasons to prepare a balance sheet. First, you (as a business owner or a business manager) will want to know where your company stands in terms of financial health at a point in time. Second, anybody interested in your company will want to see your balance sheet. Such interested parties may include the following:

  • Banks: Financial institutions want to know if your company will be able to repay a loan when you apply for one.
  • Investors: At some point one source of capital (your savings in the business) may not be sufficient to maintain a rapid growth. You may want to find investors who would like to invest in your company. Before inventors give you their money, though, they might want to see a balance sheet (and other financial statements) to ensure their investments won't go south in the future.
  • Authorities: Some authorities might like to see a balance sheet of your business. A good example is the Internal Revenue Service (IRS).
  • Vendors: Sometimes vendors ask for a balance sheet (and other financial statements) to understand if you will be able to settle your obligations. Note: Where possible, you should also ask for the vendors' financial statements to understand if your vendors will stay in business long enough to provide you with the products you buy from them.
  • Customers: Similar to vendors, customers may sometimes ask for a balance sheet (and other financial statements) to understand if you will be able to stay in business to provide them with products or services you sell. For instance, from customers' standpoint, changing vendors may be time and resource-consuming; thus, customers want to analyze your balance sheet to make sure you will not go bankrupt in the near future. Note: Where possible, you should also ask for customers' financial statements to see if they will be able to pay for goods or services you provide.

As you can see, there are a lot of parties that will be interested in a balance sheet of your company, so it's a good idea to prepare one regularly.

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