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!

To 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!

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.