To prepare a balance sheet, list assets, liabilities, and equity on a set date so total assets match total liabilities plus owner’s equity.
A balance sheet shows what a business owns, what it owes, and the owner’s stake at a specific moment in time. When you know how to prepare a balance sheet, you gain a clear snapshot you can use for lenders, investors, and your own planning.
This guide walks through the pieces of a balance sheet, then breaks down a simple method you can follow with any bookkeeping system or spreadsheet.
What A Balance Sheet Shows
A balance sheet rests on one core equation: assets = liabilities + equity. Every line you add fits somewhere in that relationship. Once you see each category, the layout starts to feel much less intimidating.
Under international standards such as IAS 1 presentation of financial statements, the balance sheet is often called the statement of financial position and sits alongside the income statement, cash flow statement, and statement of changes in equity.
For a small business owner, the structure is simpler but follows the same logic: group similar items, order them in a consistent way, and keep the totals in balance.
Main Sections Of A Balance Sheet
Most small business balance sheets use the same building blocks. The table below sums up the sections you will work with before you start entering numbers.
| Section | What It Includes | Typical Line Items |
|---|---|---|
| Current Assets | Items that convert to cash within one year | Cash, bank accounts, accounts receivable, inventory, prepaid expenses |
| Noncurrent Assets | Longer-term resources used in the business | Equipment, vehicles, buildings, long-term investments, intangible assets |
| Current Liabilities | Amounts due within one year | Accounts payable, credit cards, short-term loans, current portion of long-term debt |
| Noncurrent Liabilities | Debts and obligations due after one year | Bank loans, notes payable, mortgages, lease obligations |
| Owner’s Capital | Money the owner has put into the business | Initial capital, additional paid-in capital |
| Retained Earnings | Cumulative profit left in the business | Prior years’ profit, current year profit not yet withdrawn |
| Contra Accounts | Offsets that reduce related balances | Accumulated depreciation, allowance for doubtful accounts |
| Owner Draws | Cash or items taken out by the owner | Owner withdrawals, distributions |
Once you can place each account into one of these sections, the rest of the work becomes a matter of sorting and checking the numbers.
Step-By-Step Method: How To Prepare A Balance Sheet
Now we move into the procedure you can apply month after month. Whether you use accounting software or a simple spreadsheet, these steps stay the same.
Step 1: Choose The Reporting Date
A balance sheet always ties to a specific date, such as “December 31, 2025.” Pick the end of a month, quarter, or year. This date should match the date used on your income statement for that period.
Once you lock in the date, treat every number as of that day. Cash reflects the bank balance on that date. Inventory reflects what sits on the shelf that day, and so on.
Step 2: Gather Your Accounting Records
Pull a trial balance from your bookkeeping system, or summarize each account from your ledger if you track things manually. You want a list of account names with ending balances for the chosen date.
If you use a template from a trusted source such as the U.S. Small Business Administration’s manage your finances guidance, you can line up your trial balance accounts with the template’s layout to speed up the process.
Step 3: Separate Assets, Liabilities, And Equity
Go through your list and tag each account as an asset, liability, or equity item. Many accounting systems already mark this for you, but it helps to review the list so nothing ends up in the wrong place.
Ask yourself a simple question for each line: is this something the business owns, something it owes, or part of the owner’s stake? That quick test usually points you toward the right section.
Step 4: Split Short-Term And Long-Term Items
Within assets and liabilities, you now separate short-term and long-term items. Short-term items sit in the “current” group, long-term items in the “noncurrent” group.
Current assets include cash and assets that turn into cash within twelve months, such as customer receivables and inventory. Current liabilities include bills and debt you expect to settle within twelve months.
Step 5: Order Accounts And Enter Balances
Next, arrange assets in order of liquidity, starting with cash, then receivables, inventory, and so on. For liabilities, place items that come due soonest at the top of the list.
Create three sections in your spreadsheet or accounting report: assets on the left or top, liabilities and equity on the right or below. Enter each account in the appropriate section with its ending balance.
Step 6: Subtotal Sections And Check The Equation
Now total current assets, noncurrent assets, and then total assets. Do the same for current liabilities and noncurrent liabilities, then combine them into total liabilities.
Add total liabilities and total equity. That combined figure should match total assets. If assets do not match, something is missing or misclassified. Go back to the trial balance and confirm that every active account appears in the layout.
Step 7: Add Notes And Adjustments
Before you share the balance sheet with a lender or partner, add any final adjustments you need, such as year-end inventory adjustments or depreciation entries.
For more formal reporting under standards such as IFRS or U.S. GAAP, you would attach notes that explain accounting policies, major estimates, and other details. For a small operation, short comments next to tricky items often give enough clarity.
Once you have walked through these steps the first time, how to prepare a balance sheet for later periods turns into a shorter routine rather than a major project.
Simple Layout To Prepare A Balance Sheet From Scratch
Many owners feel most comfortable when they can see a filled-in layout. The sample structure below uses round numbers to show how the totals connect across assets, liabilities, and equity.
| Line Item | Amount (USD) | Section |
|---|---|---|
| Cash And Bank | 25,000 | Current Assets |
| Accounts Receivable | 18,000 | Current Assets |
| Inventory | 12,000 | Current Assets |
| Equipment (Net Of Depreciation) | 30,000 | Noncurrent Assets |
| Accounts Payable | 15,000 | Current Liabilities |
| Bank Loan | 20,000 | Noncurrent Liabilities |
| Owner’s Capital | 30,000 | Equity |
| Retained Earnings | 20,000 | Equity |
If you add the asset figures in this template, you reach 85,000. Combine liabilities of 35,000 with equity of 50,000 and you also reach 85,000. That match confirms the balance sheet ties out. You can apply the same structure in your own workbook, then replace the sample figures with your actual data.
Where A Simple Layout Helps
A clear layout saves time when someone outside the business reviews your numbers. A banker, investor, or accountant can scan the sections, see how debt compares with assets, and spot trends when they compare multiple periods.
If you run several product lines or locations, you can adapt this layout by splitting assets and liabilities into segments, then adding subtotals for each segment before you arrive at totals.
Common Balance Sheet Mistakes To Avoid
Even experienced owners slip up with balance sheets now and then. A few missteps appear over and over, especially when people rush through the setup.
Mixing Personal And Business Items
Personal bank accounts, personal credit cards, and household assets do not belong on a business balance sheet. Mixing them blurs the real strength of the business and can cause problems when you seek outside funding.
Keep separate bank accounts, and only record transactions that relate to the business. If you take money out for yourself, record it as a draw or distribution rather than a business expense.
Wrong Classification Of Short-Term And Long-Term Debt
Another common mistake arises when a long-term loan is listed entirely as a current liability. Only the portion due within the next year should sit in current liabilities. The rest belongs in noncurrent liabilities.
Most loan statements show the total balance along with the next year’s payment schedule. Use that breakdown to split the loan between the two sections.
Missing Depreciation On Fixed Assets
Equipment, vehicles, and buildings lose value over time. If you record only the original purchase cost and never reduce it, your balance sheet overstates the asset side.
Depreciation entries spread the cost of long-lived assets across several years. Recording these entries on a regular schedule keeps the book value closer to economic reality and lines up your balance sheet with standard practice.
Totals That Do Not Match
When total assets differ from total liabilities plus equity, the root cause is usually simple: a missing account, a sign flipped the wrong way, or a manual entry typed into the wrong section.
Run a trial balance that proves debits equal credits. Then cross-check that every active account appears somewhere in your layout. A short review like this saves headaches when someone compares periods or asks questions about the numbers.
How Often To Update Your Balance Sheet
Many small businesses prepare a balance sheet at least once a year for tax filing. In practice, a monthly or quarterly schedule gives a clearer sense of trends and keeps surprises away.
If you work with lenders, investors, or partners, they may ask for quarterly balance sheets to track debt levels and equity over time. A regular schedule also makes it easier to spot rising receivables, shrinking cash, or growing short-term debt before issues grow larger.
Using Your Balance Sheet To Make Decisions
Once you have learned how to prepare a balance sheet and keep it current, the document turns into a powerful decision tool rather than a static form.
Checking Liquidity
By comparing current assets with current liabilities, you can see whether short-term resources cover upcoming bills. Ratios such as the current ratio (current assets divided by current liabilities) give a simple yardstick for lenders and owners alike.
A strong current ratio suggests room to handle bumps in sales or timing differences between customer payments and supplier bills.
Tracking Debt Levels
The balance sheet also shows how much of your operation rests on borrowed funds. You can track total liabilities against total equity to see whether leverage grows over time.
If debt loads climb faster than profits, you might slow new borrowing, stretch investment plans, or search for ways to raise equity instead.
Planning Investment And Growth
When you plan to add a new location, hire staff, or buy equipment, your balance sheet helps you judge how much risk the business can carry. A strong asset base and healthy equity cushion give more room for new commitments.
By building a simple projection that starts from your current balance sheet, you can see how new loans and assets might shape your position one or two years from now, then adjust the plan before you sign any contracts.
A clear, consistent balance sheet anchors your financial reporting. Once you set up the structure once, repeatable steps and a steady layout let you refresh the numbers with less stress and more confidence each period.