How Do I Prepare a Balance Sheet?

All balance sheets follow the same format. If it is in two columns, assets are on the left, liabilities are on the right, and net worth is beneath liabilities. If it is in one column, assets are listed first, followed by liabilities and net worth.

There are four basic steps to follow when preparing a Balance Sheet:

1. Complete the Current Asset section

Current Assets comprise anything of value that is due to the business.
They mature less than one year and comprise among others:

• Cash


• Accounts Receivable


• Inventory


• Notes Receivable


• Other Current Assets such as prepaid expenses such as cash used to purchase in full a good or service, the benefit of which will be received within the next 12 months.


• Insurance is the most common form of prepaid expense.


• Miscellaneous and other current assets generally consist of small deposits or receivables.

2. Complete the Fixed Asset section and the Other Asset section and compute the total assets of your business

Fixed Assets are those that produce revenues and are not for resale. Being new, your company may not own a lot of fixed assets. They include furniture and fixtures, motor vehicles, buildings; land, renovation etc. make sure you account for depreciation. Patents, royalty arrangements and copyrights are also considered as intangible fixed assets.
When purchased, a fixed asset is recorded at cost. As it depreciates, an amount is accumulated on an annual basis and this is known as accumulated depreciation.

Gross Fixed Assets (Purchase Price - Accumulated Depreciation) = Net Fixed Assets (Book Value)

3. Complete the Liabilities section. Compute Total Liabilities.

Liabilities are claims of creditors against the assets of the business. They are debts owed by the business. There are two types of liabilities: current liabilities and long-term liabilities.

Current liabilities are accounts payable (to suppliers or other creditors); notes payable to banks (or others), accrued expenses (such as wages and salaries), taxes payable, the current-due within one year-portion of long-term debt and any other obligations to creditors due within one year from the date of the balance sheet.

Long-term liabilities are debts that you must repay within 1 year from the date of the balance sheet. This may include start-up financing from relatives, banks, finance companies or others.

4. Complete the Net Worth section

Net worth is the formula that defines the balance sheet:

Net Worth = Assets - Liabilities

Net worth is what you have left over after taking away liabilities of the business.

When this is done, you should have a completed balance sheet for your business.

Here is a sample balance sheet.

Assets	RM
Current Assets Cash On Hand Cash at Bank Accounts Receivable Merchandise Inventory Prepaid Expenses Rent Total Current Assets	300 2,200 1,600 5,500 1,200 10,800
Fixed Assets Equipment and Fixtures (less Depreciation) Total Assets	1,200 12,000
Liabilities Current Liabilities Accounts Payable Notes Payable, Bank Accrued Payroll Expenses Total Current Liabilities	1,100 2,200 500 3,800
*Net Worth = Assets ¨C Liabilities

The Balance Sheet is designed to show how the assets, liabilities, and net worth of a business are distributed at any given time. All Balance Sheets contain the same categories of assets, liabilities, and net worth.

• Assets are arranged in decreasing order of how quickly they can be turned into cash (liquidity).


• Liabilities are listed in order of how soon they must be repaid, followed by retained earnings (net worth or owner's equity).

Profit and Loss Account

The second primary report included in a business's Financial Statement is the Profit & Loss Account. This is a measurement of a company's sales, expenses and profitability over a specific period of time. It is also prepared at regular intervals (again, each month and fiscal year end) to show the results of operations during those accounting periods.

The P & L statements contain uniform categories of sales and expenses that include net sales, cost of goods sold, gross margin, selling and administrative expense (operating expense), and net profit.

There are two reasons why you need to prepare a P & L Statement.

• To determine whether you are making money. It helps you monitor operations and will give you important information regarding revenues and expenses


• You would need to submit this statement to the Inland Revenue Board as it records your business' operation. It would be used to assess taxes on profits earned.

Profit & Loss Categories

The profit and loss statement uses data from your business and three simple calculations to tell you the net profit/loss of your company. A basic P & L statement would cover:

Net Sales - Cost of Goods Sold	= Gross Margin
Gross Margin - Selling and Administrative Expense	= Net Operating Profit
Net Operating Profit + Other Income - Other Expense	= Net Profit before Taxes
Net Profit before Taxes - Income Taxes	= Net Profit (or Net Loss)