How to prepare a balance sheet
/What is a Balance Sheet?
The balance sheet is one of the three reports within the financial statements. It presents an organization’s assets, liabilities, and equity, in a format that balances the assets against the liabilities and equity (known as the accounting equation). The information stated on the balance sheet is as of the end of a reporting period. When the balance sheet is paired with the other two financial statements - the income statement and statement of cash flows - a user of these documents can obtain a good knowledge of the financial performance, financial position, and cash flows of the enterprise.
How to Prepare a Balance Sheet
There are a number of steps to follow to prepare a balance sheet. The recommended approach to doing so is noted in the following steps.
Step 1. Print the Trial Balance
The trial balance is a standard report in any accounting software package. The trial balance states the ending balance in every account in an organization’s chart of accounts. If you are operating a manual system, then construct the trial balance by transferring the ending balance in every general ledger account to a spreadsheet.
Step 2. Adjust the Trial Balance
It is usually necessary to adjust the preliminary trial balance to ensure that the balance sheet is in compliance with the relevant accounting framework (such as GAAP or IFRS). For example, it may be necessary to include a charge for depreciation expense or amortization expense. We use adjusting entries to modify the trial balance. Each adjusting entry should be thoroughly documented, so that auditors can determine why it was made.
Step 3. Eliminate all Revenue and Expense Accounts
The trial balance is comprised of accounts for revenue, expenses, gains, losses, assets, liabilities, and equity. Eliminate from the trial balance all accounts except those for assets, liabilities, and equity. Incidentally, the eliminated accounts are used to construct the income statement.
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Step 4. Aggregate the Remaining Accounts
The line items in the balance sheet are usually far fewer than the line items in the trial balance, so aggregate the trial balance line items into the ones used in the balance sheet. For example, there may be multiple cash accounts in the trial balance that should be aggregated into a single "cash" balance sheet line item. The typical line items used in the balance sheet are cash, accounts receivable, inventory, fixed assets, other assets, accounts payable, accrued liabilities, debt, other liabilities, common stock, and retained earnings. It is customary to use the same balance sheet line items over multiple reporting periods, so that they can be more easily compared.
Step 5. Cross-Check the Balance Sheet
Verify that the total for all assets shown in the balance sheet equals the total for all liability and stockholders' equity accounts. If there are errors, it is possible that not all accounts have been brought forward from the trial balance. This is quite possible when reporting writing software is being used, and you have mistakenly excluded an account from the report writer.
Step 6. Present in Desired Balance Sheet Format
Re-write the resulting balance sheet into the format required for presentation. For example, it may be in comparative format, where the financial position of the business as of multiple dates are listed side-by-side in the report. Or, it may be in a horizontal format, where asset line items are listed on the left, while liability and equity line items are listed on the right. A sample presentation of a vertical balance sheet appears in the following exhibit, where all assets, liabilities and equity items are presented in a single column. This approach is the most common, because it leaves enough room for the presentation of information for multiple reporting periods.
