Balance sheet: Definition, components, and examples

With many small businesses not making it past the five- or 10-year mark, what can you do to thrive past those major milestones? One opportunity to understand important small business financial insights is to create a balance sheet.

Here, we’ll summarize the balance sheet definition, what goes into a balance sheet, and how to create a balance sheet. Plus, we’ll show you a balance sheet example that we’ve created for our bookkeeping clients.

Read on for insight into this important financial statement!

What is a balance sheet?

The definition of a balance sheet is important to understand as a business owner, so first we’ll answer the question, “What is a balance sheet?”

A balance sheet takes a snapshot of your business’s financial vitality by showing its assets, liabilities, and equity on a specified day. It provides a 10,000-foot view of what your business (and shareholders) owns and owes. Balance sheets are generally used along with an income statement and cash flow statement to better understand the financial health of your business.

Similar to an income statement (also known as a profit and loss statement), it details the balance of your business’s income and expenses so you can make informed business decisions like:

• Where to get money to pay for things (like a loan or equity)
• Understanding your business’s liabilities
• How to compare the financial position of your business from month to month or year to year and use the insights to identify opportunities

The major difference between this financial document and others is the fact that it displays net equity or retained earnings. In fact, it’s the best financial document to create to get an overview of the company’s net worth at a single point in time.

In contrast, an income statement reports transactions over a period of time. Learn more about what goes on an income statement in our post, “What does an income statement show?”

Balance sheet accounts

You might find a corresponding term when searching for the balance sheet definition: balance sheet accounts. Balance sheet accounts, also sometimes called “permanent” accounts, classify and record transactions related to a company’s total assets, liabilities, and shareholder equity. The balances on these accounts are carried forward from year to year. On the other hand, income statement accounts (or “temporary” accounts) store transactions related to yearly revenues and expenses. Income statement account balances are transferred to a balance sheet account at the end of each year when financial statements are compiled from the accounting records.

Who needs a balance sheet?

Any business can get value from using a balance sheet. But, if you’re looking for small business financing or to sell your business, this document is especially important. This is because the document helps identify your business’s worth.

Additionally, many business entity structures require you to create a balance sheet annually to report the business’s financial position to stakeholders, state treasurers, and even the IRS (in some cases).

How do you create a balance sheet?

You can calculate a balance sheet using three key inputs:

• Assets: These are financial holdings a business has. They are usually categorized into current vs. long-term. Current assets can be converted to cash in one year or less and generally include cash and cash equivalents, inventory, marketable securities, and accounts receivable. Long-term or non-current assets include fixed assets and intangible assets.
• Liabilities: These are financial debts a business has. They are usually categorized by current vs. long-term. Current liabilities, like accounts payable, are due within one year and are listed by due date. Long-term or non-current liabilities like long-term debt are due at any point after one year.
• Equity: This is the remaining balance of assets and liabilities.

These inputs are put into an equation: Assets = Liabilities + Equity.

Assets are on one side, liabilities and equity are on the other. The three inputs are equated to arrive at a total.

What goes on a balance sheet?

The next question we’ll tackle is, “What goes on a balance sheet?” Here are the general elements of a balance sheet:

BUSINESS NAME

DATE PREPARED AND DATES ASSESSED

Assets	Amount	Liabilities	Amount
Current Assets: + Money in Bank + Petty Cash + Inventory + Accounts Receivable + Prepaid Insurance + Short-Term Investments		Current Liabilities: + Accounts Payable + Customer Deposits + Wages Payable + Accrued Rent or Lease Amount + Accrued Business Utilities + Accrued Federal Tax + Pension Payable + Business Dues Payable + Medical Dues Payable + Sales Tax Payable (if applicable)
Total Current Assets		Total Current Liabilities
Fixed Assets + Land Value + Real Property + Less Depreciation + Long-Term Investments		Long-term Liabilities: + Business Loans + Mortgage on Business-Owned Property
Total Fixed Assets		Total Long-term Liabilities
		Total Liabilities
		Owner’s Equity
Plant, Property, and Equipment + Equipment Value + Less depreciation		Owner’s Equity:   + Stock or investment + Retained Earnings + Less: Member Draws
Total Fixed, and Plant, Property, and Equipment Assets		Total Owners Equity
TOTAL ASSETS		TOTAL LIABILITIES AND OWNERS EQUITY

Need a balance sheet example? Look no further

We mentioned the general components of a balance sheet above. But it helps to see how it’s applied. Here’s a balance sheet example created by Block Advisors as part of our bookkeeping services.

Get help with creating a balance sheet and other small business tasks

If all of this sounds too complex, let Block Advisors help. We’re a team of experienced tax, bookkeeping, and payroll professionals dedicated to helping small businesses like yours.

We get that small business owners may not have the time or expertise to crunch numbers. Here’s where Block Advisors can help lighten your load. We offer tax, bookkeeping, and payroll services to help you get back to what you love.

Make an appointment today!

This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice. 

---