Preparation of Balance Sheet

A balance sheet is a financial document that shows the company’s total financial situation as of a specific date. The balance sheet of a firm shows the information on the company’s assets, liabilities, and owners’ equity. In layman’s terms, a balance sheet is a statement that shows the assets of the firm, the money others owe you, and the debt you owe others, including the owner’s equity.

The balance sheet is an essential financial statement that is used to make company decisions. Management, employees, investors, creditors, banks, regulatory agencies, tax authorities, and other stakeholders all utilise balance sheets.

Preparation of the Balance Sheet

Step 1: Determine the balance sheet date and period

A balance sheet is intended to display all of your company’s assets, liabilities, and shareholders’ equity on a single day of the year or throughout a specified period. The majority of businesses, particularly those that are publicly listed, will report every quarter. When this is the case, the reporting date is normally the last day of the quarter. Companies may alternatively opt to generate monthly balance sheets, in which case they would report on the last day of each month. Companies that report on an annual basis will often select December 31st as their reporting date, however, any date can be used.

Step 2: Determine the Assets

After determining your reporting date and period, you must total your assets as of that date and period. To make this section more actionable, arrange them in order of liquidity. More liquid assets, such as cash and accounts receivable, are prioritised, whereas illiquid assets, such as inventories, are prioritised last. After you’ve listed your current assets, you’ll need to mention your non-current (long-term) ones. Remember to list non-monetary assets as well.

3. Determine Your Liabilities

After the description of numerous asset categories. Similarly, you must identify liabilities. Then, list current liabilities, which include Accounts payable, Accrued costs, and Deferred income. After listing current liabilities, you must include non-current liabilities, such as deferred revenue and long-term debt.

4. Determine Shareholders’ Equity

Determine your company’s retained earnings, working capital, and total shareholders’ equity. This computation may get more complex if it is publicly traded, depending on the different forms of shares issued. This area of the balance sheet contains common line items such as common stock, preferred stock, and so on.

5. Make the sum of Total Liabilities and Total Shareholders’ Equity and compare it to Total Assets

To ensure the balance sheet is balanced, total assets must be compared to total liabilities plus equity. To do so, sum the liabilities and shareholders’ equity together. You’ve done the balance correctly if your liabilities + equity = assets. If not, you may need to go back and evaluate your sheet.

The objective of Preparing a Balance Sheet

• It is important to understand why you should have a balance sheet, whether you are a business owner or just establishing one. Balance sheets can be used to:
• Showcase your company’s current financial situation.
• Keep a record of your debits and credits.
• Assess the worth and status of all assets and liabilities.
• Determine the amount of capital owing to the owner at the end of the financial year.
• Use as a reference if there is a need for a loan.
• Understand the company’s liquidity pattern and profit/loss status.
• Evaluate the business’s strengths and shortcomings and use them as a guideline for developing policies and goals for the company.

Who is responsible for the preparation of the balance sheet?

Depending on the company, many parties may be responsible for preparing the balance sheet. The balance sheet for a small privately held firm may be completed by the owner or by a company bookkeeper. They may be prepared internally by a mid-size private business and then reviewed by an external accountant.

Public enterprises, on the other hand, are required to have external audits performed by public accountants and to keep their accounts to a far higher level. These firms’ balance sheets and other financial statements must be prepared following Generally Accepted Accounting Principles (GAAP) and Indian Accounting Standards (IND AS)

Conclusion 

A balance sheet, which is frequently used in accounting, can be used by business owners with valuable information about their company’s financial health. A balance sheet, like a profit and loss statement and cash flow statement, is intended for distribution to those outside of a firm. After each accounting period, bookkeepers and accountants should prepare a balance sheet, especially since IND AS  standards compel all Indian firms to prepare financial reports. In reality, balance sheets are utilised both internally and publicly for several purposes, such as calculating working capital and tracking operational costs.