What is a Balance Sheet? How to Create One and More

A balance sheet is one of the most critical financial documents for a business owner to understand. It provides a snapshot of a company’s financial health at a given point in time, showing what it owns (assets), what it owes (liabilities), and the value left for its owners (equity). Knowing how to read and create a balance sheet can give you a clearer understanding of your business's financial standing and help you make more informed decisions.

This article will explain what a balance sheet is, walk you through how to create and manage one, and share a balance statement example to guide you.

What is a Balance Sheet?

A balance sheet (also referred to as a balance statement) is a financial report that outlines three main components:

• Assets: What your company owns
• Liabilities: What your company owes
• Equity: What’s left over

These three parts are connected through the balance sheet equation: Assets = Liabilities + Equity

‍This equation must always remain in balance — hence the term balance sheet.

Why Balance Sheets Matter

Understanding this document is essential because it helps you:

• Track the financial position of your business at a specific moment
• Identify trends in your debt-to-asset or equity ratios
• Assess liquidity and solvency (can your business pay its bills?)
• Prepare for tax season or secure funding from investors and lenders

Components of a Balance Sheet

Here’s a deeper look at each of the three main sections:

1. Assets

Assets are typically categorized as either current or non-current:

• Current Assets are those that are cash or are able to be converted to cash within one year. These can include:
  
  • Cash and cash equivalents
  • Accounts receivable
  • Inventory
  • Prepaid expenses
• Non-Current Assets are your business’ longer-term investments. These may look like:
  
  • Property and equipment
  • Financial investments (like bonds)
  • Intangible assets (like patents or trademarks)‍

‍2. Liabilities

Like assets, liabilities are also split into current and long-term:

• Current Liabilities are those due within one year. For example:
  
  • Accounts payable
  • Short-term loans
  • Accrued expenses
• Long-Term Liabilities are those due after one year. These can be things like: 
  
  • Long-term loans or debt
  • Deferred tax liabilities
  • Lease obligations

3. Equity

Equity represents the residual value of the business after liabilities are subtracted from assets. This includes:

• Owner’s capital or invested funds
• Retained earnings
• Stock (for corporations)

Balance Sheet Equation Explained

The balance sheet equation is the foundation of double-entry bookkeeping. It ensures that a company's books are always balanced.

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For example, if your business owns $500,000 in assets and owes $300,000 in liabilities, then your equity would be:

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This formula can help you check that everything on your balance sheet is recorded correctly, so you have a clear view of where your business is financially.

How to Create a Balance Sheet

Follow these steps to build your own balance statement sample:

Step 1: Choose a Reporting Date

Most businesses prepare balance sheets monthly, quarterly, or annually. The date you choose will reflect your financial snapshot “as of” that day.

Step 2: List Your Assets

Separate assets into current and non-current categories. Sum up each section and then total both to calculate your total assets.

Step 3: List Your Liabilities

Just like with assets, split liabilities into current and long-term categories. Add them together for total liabilities.

Step 4: Calculate Owner’s Equity

Include items like retained earnings, owner’s capital, and stock (if applicable). Add them up for your total equity.

Step 5: Apply the Balance Sheet Equation

Make sure your Assets = Liabilities + Equity. If they don’t, something was recorded incorrectly and may need to be looked into further. 

Balance Statement Example

Here’s a simple balance statement sample for a fictional company:

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This sample shows a company with $100,000 in assets, split evenly between liabilities and equity — illustrating the balance sheet equation in action.

Best Practices for Managing Your Balance Sheet

• Keep it up to date: Update your balance sheet regularly (monthly or quarterly).
• Use accounting software: Accounting tools and platforms can simplify reporting.
• Review for accuracy: Double-check entries to ensure the equation is balanced.
• Analyze trends: Look at changes in equity, liquidity, and debt over time.

Final Thoughts

Understanding what a balance sheet is and how to use it helps business owners get a clearer view of their company’s financial footing. By tracking assets, liabilities, and equity, you gain the insights needed to make smarter financial decisions, attract investors, and maintain long-term stability.

Whether you’re building your first balance statement or looking to refine existing reports, mastering the balance sheet equation and regularly reviewing your statements is key to maintaining a financially healthy business.