Balance sheet: what it is, how to do it step by step and a practical example

The article will explain all one needs to know about this key financial statement-from what a balance sheet is, to a step-by-step explanation of how one would go about preparing one, with a real-life example. Take a look!

What is the balance sheet?

Accounting Balance Sheet: The balance sheet is a summary of the financial situation of an entity at any given date in quantitative and qualitative terms and traits.

This looks a great deal like a flash snapshot of the financial position of the company, showing all that it owns, is due, owes, and is worth-the latter being the difference between the two.

More than an accounting document, this financial report is an essential strategic tool for analyzing financial behavior, mapping the flow of resources, supporting strategic planning and guiding tax planning.

Informed financial decisions and an attractive presentation to investors are just some of the facets that make this report essential for business success.

Unlike the trial balance , which covers shorter periods, the balance sheet is the clear and precise language of numbers that drives financial intelligence.

How important is the balance sheet?

The importance of the balance sheet goes beyond legal compliance, being a multifaceted tool for the effective management of business resources and concise corporate financial control . Its relevance stands out in:

• Assertive financial decisions: provides the necessary basis for informed and strategic financial decisions.
• Bringing in investors: clearly and objectively displays the company’s financial health, which acts as a deciding factor for possible investors.

Therefore, a thorough balance sheet enables both the satisfaction of legal obligations and the assessment of the company’s profitability and financial health.

What is the Balance Sheet used for?

It is meant to provide an extended and understandable view of equity and the financial situation of the enterprise at any given date.

It identifies all assets, investments, rights, and liabilities as a strategic tool for in-depth financial research, offering critical information for:

• Analyze financial performance: allows a detailed analysis of the company’s financial behavior;
• Mapping the flow of resources: reveals how the company’s financial resources are used and managed over time;
• Basis for strategic planning: serves as a foundation for the construction of strategic planning, guiding future goals;
• Tax planning tool: facilitates the identification of opportunities for tax optimization, providing a clear view of the taxes paid.

When and why to carry out the balance sheet?

As determined by the Civil Code, the accounting balance sheet is a requirement for most companies. It stands out as one of the most essential financial statements, usually prepared at the end of each financial year.

It is usually prepared annually, that is, every 12 months. However, it is possible to do it in a shorter period to meet some of the purposes mentioned above.

It is submitted in the following year, following a timeline similar to the Income Tax return , which must be completed by the fourth month after the end of each fiscal year.

To remain compliant with legal obligations, it is crucial to monitor the situation annually and keep all company records, documents and information up to date.

Balance sheet structure

A company’s balance sheet, a unique and mandatory document, follows a standard defined by law and does not allow for variations. Its fundamental structure comprises three categories of accounts: assets, liabilities and equity. Let’s look at each of them briefly:

Active

Current: values ​​for short-term operations:

• Cash and cash equivalents;
• Financial applications;
• Accounts receivable (up to 12 months);
• Stocks;
• Advance expenses (up to 12 months);
• Taxes to be recovered.

Non-current: long-term assets:

• Achievable in the long term;
• Investments;
• Fixed assets;
• Intangible.

Passive

Current: debts to be settled within one year:

• Social and labor obligations;
• Obligations to suppliers;
• Tax obligations;
• Business loans and financing.

Non-current: debts to be settled after one year.

Net worth

• It consists of the initial investment plus reinvested earnings and reflects the values of investors, quota holders, and shareholders.

Every financial year must finish with the preparation of the balance sheet, which takes a year, and its presentation in the subsequent year.

The assets, liabilities, and equity in the standard structure represent the financial state of the firm on a certain day.

There are no different versions; a single standard imposed by law is followed. The basic structure, with assets, liabilities and equity, is constant, and is essential for a comprehensive analysis of the company’s financial health.

6 steps to preparing a balance sheet

Before embarking on the development of the balance sheet, it is imperative to have a consolidated accounting report, which brings together all the accounting records for the period under analysis.

This requires prior recording in the Daily Book , intended to record all financial events, including entries and exits.

Now, check out our step-by-step guide on how to prepare a balance sheet:

1. Determine the analysis period

The balance sheet, which is typically generated every 12 months, examines a certain time period and can be customized to the needs of the business.

2. Value of the company’s assets

List all of your rights and assets, including long-term (non-current assets) and short-term (current assets). Include the total of these numbers in the report.

3. Establish the liabilities of the business.

The total of all obligations, including debts and ongoing costs, should be calculated. These are also taken into consideration while determining the accounting balance.

4. Raise the value of equity

Calculate net worth with the simple formula:

• net worth = assets – liabilities.

5. Prepare the balance sheet

Organize the document with company data in the header, assets on the left, liabilities and equity on the right, listing the values ​​in decreasing order of liquidity.

6. Perform further analysis and determine KPIs

Make sure assets and liabilities are balanced, and look into other metrics to have a better understanding of your business’s performance.

Examples of KPIs include Return on Investment (ROI), Customer Acquisition Cost (CAC), EBITDA, Lifetime Value (LTV), Profit Margin and Average Ticket, among others.