No matter how big or how small, all retail companies must utilize some accounting to track their profitability and viability. Indeed, there are some essential assessments to be performed by every type of business. One of these assessments is a balance sheet. Knowing how to write a balance sheet is a must for all retail operators.
Balance sheets are especially important for business managers to fully comprehend their company’s health. They’re also necessary in order to present their business to potential buyers or additional investors. Read on for a more detailed, step-by-step guide on balance sheets and how they are used.
Table of Contents
- Defining The Balance Sheet
- What’s The Purpose Of A Balance Sheet?
- The Balance Sheet Formula
- The Assets Section Of A Balance Sheet
- The Liabilities Section Of A Balance Sheet
- The Equity Section Of A Balance Sheet
- Preparing A Balance Sheet
- What Does A Good Balance Sheet Look Like?
What Is A Balance Sheet?
A balance sheet is a financial statement that shows the value of a company. Essentially, it spells out exactly what the business owns and what it owes. It also discloses how much money has been invested.
The three components that are always on a balance sheet are assets, liabilities, and equities. Statements are typically prepared on a monthly or quarterly basis. They are snapshots of a company’s health at a particular time and are always labeled with a date.
See also: Retail Store Accounting Methods 101
Why Create A Balance Sheet?
There are two different uses for a balance sheet. The first use is for internal review and reporting. The second is meant for external analysis.
Internal Review
An internal review is meant to assess the company at large. Evaluating the numbers on a balance sheet can help business managers see how their enterprise is performing. Are they meeting the demands of investors? Will the businesses remain competitive and viable? Is it being successfully managed?
The answer to these questions can help businesses decide whether they should make changes and, if so, in what areas the changes should be made. It gives an internal health check to see what needs to be done in the future.
External Review
Externally, balance sheets provide the same information but to potential investors. They allow outside sources to get a clear picture of the company’s valuation, liquidity, and profitability. Cash management and risk can be assessed through this review.
In addition, external investors will be provided with information about where the financing came from and what resources are available. Any irregularities or suspicious financial dealings can therefore be adequately scrutinized.
What Is The Formula For Balance Sheet Computation?
The balance sheet formula itself is quite straightforward:
Total assets = Liabilities + Owner’s equity
In other words, the total assets of your business should equal the sum of the liabilities plus the owner’s equity. Here’s some more info about these items.
What Goes Under Assets On A Balance Sheet?
Assets refer to all monetary value that a business possesses. These assets are split between current assets and long-term assets.
Current assets refer to items of value that are in a business’s immediate possession. Technically, they must be convertible to cash within one year.
Current assets typically include the following:
- Cash and liquid assets – anything that’s immediately available
- Accounts receivable – money that’s owed to the business in the short-term
- Prepaid expenses – i.e. things like business insurance
- Inventory – the stock of products that you purchased wholesale and will sell at retail
- Securities – investments like highly liquidable stocks and bonds
Long-term assets refer to “illiquid” assets or investments that cannot be readily converted:
- Intangible assets – licenses, copyrights, and patents
- Fixed assets – real estate, buildings, software, and equipment
- Long term investments – things like bonds that are not convertible within a one year time frame
What Are Liabilities On a Balance Sheet?
Liabilities are all of the money your company owes. This includes both short-term and long-term liabilities.
Current liabilities are what your business owes in the immediate future:
- Utility expenses – gas bills, electric bills
- Tax bills – your company’s tax liability, which is typically paid quarterly
- Rent – for your offices, retail locations, etc.
- Wages payable – your total employee payroll
- Accounts payable – the immediate money that is owed to wholesalers, freight operators, and anyone else that you pay for external goods and services to operate your business
Long-term liabilities are expenses that your company will have to pay over time:
- Bonds payable – any future amount owed to purchasers of your company’s bonds
- Long-term loans – if you took out a small-business loan or borrowed other money for business expenses that you will be paying over the course of several years
Balance Sheet Equity: What Is It?
The final element to the balance sheet is the shareholders’ equity. This refers to the money that has been invested in a company by its owners. It also includes money that has been generated as revenue and then reinvested in the company.
As such, the owner’s equity is comprised of two main things:
- Share capital – shareholders’ stocks
- Retained earnings – the leftover money after paying dividends
Preparing A Balance Sheet
Once you have all these elements and figures compiled, you can make your balance sheet:
- Add up all of your assets
- Add up all of your liabilities
- Determine the owner’s equity
- Combine the owner’s equity and liabilities
- That should be exactly equal to your assets
Here’s a diagram to better illustrate:
What Should A Healthy Balance Sheet Show?
As previously mentioned, once you figure out how to write a balance sheet, you can use it as an assessment. There are many insights that can help reviewers ascertain important elements of a company. The most crucial areas to pay attention to are accounts receivables, cash, and debt obligations.
These numbers basically tell you or potential investors how much money is coming in, how much money you have on hand, and how much money you owe. By looking at balance sheets from different dates, analysts can determine whether a balance sheet looks healthy by focusing on the relationships between these numbers. Here are two other critical factors to think about:
Equal Capital Structure
The balance sheet will show what kind of relationship you have between equity and debt. Equity financing is more expensive than debt but doesn’t require payments during periods of lower revenue. Debt, on the other hand, is cheaper to acquire but can be particularly troublesome to pay back. The idea is to keep an equilibrium between the two and strategically borrow debt when interest rates are low.
Smart Working Capital
Having enough money on hand is essential for every business. At the same time, that same cash can be put to much more effective use, such as investing in higher-interest assets, issuing dividends, and paying off debts. In addition, keeping an ample amount of inventory on hand is crucial to maintaining consistent sales. As such, finding a sweet spot for your working capital (that is, having cash on hand and ample inventory, and smart investments) is a must.
Sales Data And Accurate Balances
In order to write an accurate balance sheet, you’ll need to make sure that all of the numbers that you input are correct. At some point, you are likely to run into some hiccups with data entry and computations. Luckily, with a powerful point of sale system, you can easily access all of your sales information and history in no time.
KORONA POS offers the most robust reporting capabilities in the industry. Bolster your balance sheet with an array of analytical formulas and various retail KPIs. Our software comes with built-in ABC analysis and a fully customizable dashboard. Get a deeper look past your balance sheet into the health and profitability of your businesses. Try KORONA POS today!
FAQs: How to Write a Balance Sheet
The three basic parts of a balance sheet are assets, liabilities, and owner’s equity. The assets are the monetary value of what your company owns. The liabilities refer to all of the money that your business owes. Owner’s equity is the capital that was invested or reinvested from profit into the enterprise.
To prepare a balance sheet, you add up all assets, all liabilities, and all of the investor equity. The assets should equal the liabilities plus the investor equity. If the numbers are off, then you either made a mistake or some of your reporting is incorrect.
A good balance sheet should have a higher amount of accounts receivable and cash than accounts payable and liabilities. They also should ideally have an equilibrium between debt and equity, as well as a solid amount of inventory and other investments.
You know that your balance sheet is correct if the assets equal all liabilities plus any investor equity. If those are not equal, then your sheet isn’t “balanced.” That means that somewhere someone made a mistake in either reporting or computation.
