When a company prepares a balance sheet, regardless of its length or complexity, accountants always adhere to a set of fundamental principles to acceptably account for the firm's assets and liabilities each reporting period. A balance sheet is only acceptable if the information it contains is true and accurate. Once you master a few simple concepts, preparing your own acceptable balance sheet is not as daunting a task as you might expect.
1. Prepare a list of every fixed asset the company owns and its acquisition cost. The balance sheet reports all fixed assets a company owns using its acquisition cost rather than fair market value. Fixed assets include all property with a useful life exceeding one year. This includes buildings, land, equipment, furniture and computer systems.
2. Calculate depreciation of fixed assets. The balance sheet continues to report fixed assets at cost for each accounting period until the company retires or disposes of the assets. However, to report the cumulative reduction in value that occurs each successive year, you must separately account for the depreciation that accumulates on these assets. For example, if your company purchases equipment that has a useful life of 10 years for $10,500 that it can sell for $500 at the end of the 10-year period, you calculate the annual depreciation expense of $1,000 as the cost minus the $500 salvage value, divided by its 10-year useful life.
3. Prepare a list of the company's liquid assets and each asset's corresponding value. Some assets are reported on the balance sheet at fair market value. These include the cash balance the company has on hand and the market price of securities such as stock and bond investments as of the balance sheet date.
4. Prepare a list of all company liabilities. You must report all company debts, such as bank loans, bond issuances and unpaid invoices as liabilities. Report each liability's outstanding balance as of the balance sheet date.
5. Calculate the equity balances of the company. The equity of a company is the amount the owners, or in the case of a corporation, the shareholders, contribute to the firm in exchange for an ownership interest, as well as the company's retained earnings. Use the actual contributions of investors, not the fair market value of the ownership interest, such as the current stock price.
6. Prepare the balance sheet. The first section of the balance sheet is where you list all categories of assets, such as cash, accounts receivable, equipment, supplies and buildings, and their respective values. Following the asset section is where you list all liabilities and the outstanding balances for each category, such as notes payable, unpaid invoices and bonds payable. Lastly, report the retained earnings and investor contributions in the equity section of the balance sheet.
- Check to insure that the total asset balances equal the sum of the liability and equity balances. If the statement doesn't balance, it's likely the result of an omission or reporting an account in the wrong category.
Items you will need
- Company trial balances for the relevant accounting period