A balance sheet or statement of financial position is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership, a corporation, private limited company or other organization such as Government or not-for-profit entity. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year.

A standard company balance sheet has two sides: assets, on the left and financing, which itself has two parts, liabilities and ownership equity, on the right. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.

Another way to look at the balance sheet equation is that total assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's or shareholders' equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing".

A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they cannot, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words, businesses also have liabilities.

HOW TO PREPARE A BALANCE SHEET

A balance sheet is a summary of a firm's assets, liabilities and net worth. The key to understanding a balance sheet is the simple formula:

Assets = Liabilities + Net Worth

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.

Here is a sample balance sheet for the Doodads Company.

Doodads Co. Balance Sheet as of Dec 31, 200X

Assets$$Current Assets      Cash On Hand$ 300     Cash in Bank$ 2,200     Accounts Receivable$ 1,600     Merchandise Inventory$ 5,500Prepaid Expenses      Rent$ 1,200Total Current Assets$10,800Fixed Assets      Equipment and Fixtures
     (less Depreciation)$ 1,200Total Assets$12,000Liabilities$$Current Liabilities      Accounts Payable$ 1,100     Notes Payable, Bank$ 2,200     Accrued Payroll Expenses$ 500Total Current Liabilities$ 3,800Long-Term Liabilities$     Notes Payable, 1998$ 5,500Total Liabilities$ 9,300Net Worth*$ 2,700Total Liabilities and Net Worth$12,000*Net Worth = Assets − Liabilities

Assets

In this section, each type of asset is explained. A worksheet is provided for your use in assembling a balance sheet for your business at the end of this section.

All balance sheets show the same categories of assets: current assets,long-term (fixed) assets, and other assets. Assets are arranged in order of how quickly they can be turned into cash. Turning assets into cash is called liquidity.

Current assets include cash, stocks and bonds, accounts receivable, inventory, prepaid expenses and anything else that can be converted into cash within one year or during the normal course of business. These are the categories you will use to group your current assets. This Business Builder focuses on the current assets most commonly used by small businesses: cash, accounts receivable, inventory, and prepaid expenses.

Cash is relatively easy to figure out. It includes cash on hand, in the bank and in petty cash.

Accounts receivable is what you are owed by customers. The easy availability of this information is important. Fast action on slow paying accounts may be the difference between success and failure for a small business. To make this number more realistic, you should deduct an amount from accounts receivable as an allowance for bad debts.

Inventory may be your largest current asset. On a balance sheet, the value of inventory is the cost to replace it. If your inventory were destroyed, lost or damaged, how much would it cost you to replace or reproduce it? Inventory includes goods ready for sale, as well as raw material and partially completed products that will be for sale when they are completed.

Prepaid expenses are listed as a current asset because they represent an item or service that has been paid for but has not been used or consumed. An example of a prepaid expense is the last month of rent of a lease that you may have prepaid as a security deposit. It will be carried as an asset until it is used. Prepaid insurance premiums are another example of a prepaid expense. Sometimes, prepaid expenses are also referred