What is a balance sheet for business?

Your business’s finances are one of the most important considerations when you are developing business plans and strategies. A balance sheet may be the ideal tool for helping you better understand your current financial standing and where to make improvements. It may also be required by lenders, investors and the IRS as they assess your financial health.

If you haven’t used balance sheets before—or if you need a quick refresher—this article covers what they are, what they can be used for and tips to make them your own.

What you’ll learn:

• A balance sheet is a statement of shareholders’ or owner’s equity and a business’s liabilities and assets as of any given date.
• On a balance sheet, a company’s liabilities plus equity should always equal the company’s assets.
• Balance sheets can be used to gauge a company’s financial position and may be requested by lenders, investors and potential buyers. 

A balance sheet is a financial statement that highlights how much your business owes and owns at a specific point in time. Balance sheets also allow you to monitor your business’s net worth and, when compared to previous balance sheets, trends in your company’s financial health. 

Balance sheets may be required by:

• Lenders
• Current investors
• Potential investors
• Buyers (if you’re selling your business)

The format of a balance sheet usually places assets on one side and liabilities and shareholders’ equity on the other. It uses the following formula:

Liabilities + Equity = Assets

Your assets should equal your total liabilities plus shareholders’/owner’s equity. If they don’t, there may be mistakes in—or data missing from—your balance sheet.

Though it’s an essential financial statement, a balance sheet may have certain limitations. On its own, a balance sheet isn’t often useful for identifying trends—it must be compared to previous balance sheets for this. It’s important to keep in mind that a balance sheet may need to be paired with additional documents, such as income statements and cash flow statements to provide a better understanding of the financial health of the business.

Balance sheets are prepared by you or your accounting team at regular intervals, such as quarterly or annually, and have 3 regular components:

Your business assets are anything of value that your company owns or is owed. They include items such as:

• Cash or cash equivalents
• Investments
• Product inventory
• Owned equipment
• Prepaid expenses
• Accounts receivable (or money that’s owed to your business) 
• Owned property, such as real estate or company vehicles

Your business liabilities are debts, or the amount your business owes to others. They include items such as:

• Loans
• Credit card debt
• Wages for staff
• Deferred tax liability
• Accounts payable, like software subscriptions, vendor payments, rent and utilities

Equity is the difference between your assets and your liabilities. It can also be known as net assets or net worth. In large businesses that have investors, this represents the shareholders’ equity. In sole proprietorships and small businesses, it represents the owner’s equity.

Examining balance sheet examples can give you a better understanding of how they’re formatted, what information to include and how to present that information. There are typically 3 sections of a balance sheet—assets, liabilities and owner’s equity—and the total liabilities plus equity should match the total assets.

For instance, let’s say you have a company called Imaginary Division Inc. that has $456,000 in assets, $224,500 in liabilities and $231,500 in equity. The equity and liabilities add up to the total asset amount. The information may be broken down similarly to the balance sheet example below:

From internal to external uses, here are some reasons for creating a balance sheet for your business:

A balance sheet should give you a sense of your business’s current financial health. You may use it to calculate financial ratios like return on equity ratio. You can compare past and current balance sheets to monitor your company’s performance over time. You can also use a balance sheet to identify financial trends and inform business strategies.

A balance sheet may also help guide your financial decisions, such as determining whether you can take on short- or long-term financial obligations based on your current and noncurrent liabilities and assets.

While you may not have access to your competitors’ specific financial details, you can often find the average working capital ratio, quick ratio and debt-to-equity (D/E) ratio for businesses in your industry from reliable business statistics and analysis sources. Your balance sheet should allow you to calculate these ratios for your own business and see how they compare to your industry’s averages.

Two of the most common ratios used to measure a business’s financial performance are the D/E ratio and quick ratio. 

• The D/E ratio measures your company’s financial leverage by dividing your company’s total liabilities by the shareholders’ or owner’s equity. Healthy businesses generally have a D/E ratio of 1 to 1.5.
• The quick ratio, also known as the acid-test ratio or liquidity ratio, measures your business’s ability to settle its current liabilities immediately using cash and quick assets (those that can be turned into cash within 90 days).

Those same ratios may be calculated by potential investors who examine your balance sheet before deciding whether your business is a wise investment. The D/E ratio may help both you and investors determine whether your company is funded primarily through debt, which can be financially risky, or through its own money. The quick ratio should also help you and potential investors gauge whether the company can afford the current debts it has taken on.

To create a balance sheet, start by setting your reporting date, which is typically the last day of an accounting period. Then, create a list of your assets, organized by current and noncurrent assets. From there, identify your liabilities and separate them into current, or short-term liabilities and noncurrent, or long-term liabilities. Then, calculate the shareholders’ equity.

Once you have this information, add together your total liabilities and shareholders’ equity to determine whether the amount equals your business assets.

When preparing a balance sheet, consider the following tips:

• Use a template to minimize errors. Templates may be available through accounting or office software and should help ensure that data goes in the right place and that calculations are correct.
• Determine when and how often balance sheets will be created. Balance sheets are most useful when created on set dates at regular intervals, such as quarterly or annually. Completing balance sheets on the same date(s) each year should provide a more accurate sense of your business performance year over year or quarter over quarter.
• Calculate the shareholders’ or owner’s equity. Shareholders’ or owner’s equity should equal your total assets minus your total liabilities. If it doesn’t balance out, there’s likely an error on the sheet. Even if it does balance out, it’s always a good idea to double-check your math to ensure there are no mistakes and there is no missing information.

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This content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.