Preparation of Balance Sheet of the Firm

A balance sheet is a statement that reflects the company’s financial position. The balance consists of the liabilities and assets of a company and maintains the entire record. Non-profit organisations also design their balance sheets to determine their financial positioning.

What is the Balance Sheet?

The balance sheet is a statement of the organisation’s net worth as it includes all the assets and liabilities together. It also consists of a separate column for shareholder’s equity. The balance sheet is framed not only for for-profit organisations but also created for non-profit organisations. However, the balance sheet is a statement that is prepared in the same pattern as profit organisations. It consists of similar columns about liabilities and assets of the organisation. In a balance sheet, the assets of the organisation are recorded on the right-hand side, whereas the liabilities are mentioned on the left-hand side.

Preparation of a Balance Sheet of the Firm

• Composing a trial balance – When preparing the balance sheet, the first step is to compose a trial balance that is included in all accounting programs. If you are opting for preparing a balance sheet manually, build a trial balance while transferring the ending balance of the general ledger account to the spreadsheet.
• Arranging the trial balance – The next step includes arranging the trial balance for ensuring that the balance sheet is the same as the entire accounting structure. During the adjustment of the entries, make sure every entry is recorded properly, so it is easier for auditors to see why it is made.
• Discard all revenue and expenses accounts – The trial balance has revenue, expenses, gains, equity, liabilities, losses, and assets. It is suggested to delete everything except the liabilities, equity, and assets. Note the deleted part will be used later for creating the income statement.
• Calculating the remaining accounts – This is the final stage of preparing the balance sheet, where the entire trial balance sums up and is used for creating the balance sheet. Here is the list of items that are used in the balance sheet: Accounts receivable, Cash, Debt, Other assets, Common stock, Inventory, Accrued liabilities, Fixed assets, Accounts payable, Other liabilities, Retained earnings

• Validating the balance sheet – Both sides of the balance sheet should be equal to each other, which means the total assets need to be the same as equity accounts of stakeholders and liabilities.

Balance Sheet Key Features

• The balance sheet is termed the final step while creating final accounts.
• The balance sheet is a statement; however, people misinterpret it as an account.
• The transactions are recorded on either the left or the right-hand side in a balance sheet, namely, assets and liabilities.
• While calculating the balance sheet, the total amount of both sides should be equal to each other.
• The company’s balance sheet states the actual monetary state of the company.
• The balance sheet is generally prepared after the preparation of the trading and profit and loss account.

Importance of Balance Sheet

The person who knows how to read or interpret a balance can state a lot about the company’s financial condition. Below are several points that state the importance of a balance sheet of the new firm.

• Investors, creditors, and stakeholders who are starting their business prefer using the balance sheet to analyse an organisation’s overall financial position.
• The balance sheet is an ideal way for analysing the overall growth and development of the new organisation.
• When a company applies for the load, they are supposed to submit the balance sheet.
• By looking at the balance sheet, the organisation’s stakeholders analyse the organisation’s liquidity position and status.
• It also helps to analyse future expenses.

Purpose of the Balance Sheet

The primary reason for preparing the balance sheet is to analyse the company’s financial position. This sheet clearly unveils all the liabilities and assets that the company owns along with the invested money. Further, this sheet is analysed by the creditors and the investors who have invested in understanding the organisation’s overall growth. Note the balance sheet is mostly prepared during the end of the accounting period.

Conclusion

With this, we end our deep dive into the preparation of the balance sheet of the new firm. The balance sheet is a statement of a company’s financial position which records the organisation’s net worth, as it includes all the assets and liabilities together. It also consists of a separate column for shareholder’s equity. We covered the features of the balance sheet, the importance of the balance sheet, balance sheet example, and other related topics such as the preparation of the balance sheet of the new firm in detail.