How to create Balance Sheet

The Balance Sheet attempts to show how much the business is worth. It does this by illustrating the value of the business’s net assets.

In order to do this, our balance sheet displays the difference between a business’s assets and liabilities. This difference is known as the business’s net assets, and is considered to be the “value” of the business. Obviously, every successful business owner wants to amass the highest amount of net assets as possible!

https://cdn.guru99.com/images/Lesson12-BalanceSheet.webpTo create our balance sheet, we’re going to need the remaining sections from our Trial Balance – Assets, Liabilities, Owners Equity and Drawings. Take a quick look at those.

TRIAL BALANCE FOR (NAME)’S BAKERY AS AT (TODAY’S DATE)

DEBIT SIDE

CREDIT SIDE

 

 

Assets

Liabilities

Bank $21,650

Loan $9,000

Computer $1,500

John’s Car Shop $3,000

Car $3,000

Accumulated depreciation $400

iPhone $500

Taxation Payable $675

Oven $500

 

 

 

Expenses

Revenue

Cake mix $3,000

Sales $7,000

Interest expense $1,000

 

Telephone expense $300

 

Repairs expense $50

 

Depreciation $400

 

Tax Expense $675

 

Drawings

Owners’ Equity

Drawings $1,000

Owner’s Equity $15,000

 

 

 

 

Balance $34,400

Balance $34,400

 

 

Let’s take a look at these numbers:

Assets
Bank $24,150
Computer $1,500
Car $3,000

Liabilities
Loan $9,000
Johns Car Shop $3,000
Taxation Payable $675
Accumulated Depreciation $400

Owners’ Equity
Owners Equity $15,000
Drawings $1,000

We’ll also need to know our net profit for the year, which we know from our Profit and Loss statement, which is$1,575. Alright, that’s all the information we need. Let’s get started. The basic format of a Balance Sheet is:

Assets – Liabilities = Owners Equity (Net Assets)

Using the figures from our Trial Balance, simply fill in the blanks on the Balance Sheet below. Note that there are two formats, a “T” format and a list format. Both formats are commonly used, and are simply different methods of displaying the same information.

BALANCE SHEET FOR (NAME)’S BAKERY AS AT (TODAYS DATE)

Assets

 

 

Liabilities

 

 

Bank

$21,650

 

Loan

$9,000

 

Computer

$1,500

 

John’s Car Shop

$3,000

 

Oven

$2,000

 

Taxation Payable

$675

 

iPhone

$500

 

 

 

 

Car less accumulated depreciation

$2,600

 

 

 

 

Total Assets

 

$28,250

Total Liabilities

 

$12,675

 

 

 

 

 

 

 

 

 

Owner’s Equity

 

 

 

 

 

Owner’s Equity at start of year

$15,000

 

 

 

 

Minus: Drawings

$1,000

 

 

 

 

Plus: Net Profit After Tax

$1,575

 

 

 

 

Owner’s Equity at year end

 

$15,575

 

 

 

 

 

 

Total

 

$28,250

Total

 

$28,250

 

 

BALANCE SHEET FOR (NAME)’S BAKERY AS AT (TODAYS DATE)

 

 

 

Owner’s Equity

 

 

Owner’s Equity at start of year

$15,000

 

Minus: Drawings

$1,000

 

Plus: Net Profit After Tax

$1,575

 

Owner’s Equity at year end

 

$15,575

 

 

 

Represented by:

 

 

Assets

 

 

Bank

$21,650

 

Computer

$1,500

 

Oven

$2,000

 

iPhone

$500

 

Car less accumulated depreciation

$2,600

 

Total Assets

 

$28,250

 

 

 

Less: Liabilities

 

 

Loan

$9,000

 

John’s Car Shop

$3,000

 

Taxation Payable

$675

 

Total Liabilities

 

$12,675

 

 

 

NET ASSETS (Total Assets minus Total Liabilities)

 

$15,575

 

 

 

 

 

 

GREAT! We’ve just completed our Balance Sheet.

Let me point out a few interesting things about it.

1. Notice how the Owner’s Equity at the top of the statement balances with the Net Assets at the bottom of the statement. They’re both $15,575. This is where the term Balance Sheet comes from. If your Balance Sheet doesn’t balance, you’ve got a problem!

2. Notice how your Owner’s Equity changed. It’s now $15,575, even though you’ve only put $15,000 into the business, which was the original amount. This is because you made a profit. As the owner, this profit is yours! Each year, any profit you make will carry over to the Owner’s Equity section of the Balance Sheet. If you’ve been in business for 10 years, then 10 years of profit will have been accumulated in your Owner’s Equity. Think of Owner’s Equity as the amount the business owes to you, so whenever you make a profit, it’s yours! Oh the joys of being a business owner!

3. Your Owner’s Equity only increased by $575, even though you made $1,575 in profit. Why is that? It’s because you took $1,000 of drawings during the year. That means although the $2,250 profit is yours, you already took $1,000 of it. Owners need to be careful not to withdraw so much in drawings that their Owner’s Equity falls below zero.

 

That’s it friends! We’ve started our business, recorded all our transactions, prepared a list of journal entries, entered them into our ledgers, taken our ledger balances into a trial balance, and finally produced a Profit and Loss Statement and a Balance Sheet!

https://cdn.guru99.com/images/Lesson12-Boy.webp

This is the accounting process in action, and we now have two key reports that provide valuable information and will allow us to make good financial decisions.

We’ll talk a bit about that in a later tutorial.