business plan balance sheet definition

What Is A Balance Sheet? (Example Included)

Updated: Jun 1, 2024, 2:22pm

Table of Contents

What is a balance sheet, components of a balance sheet, how to balance a balance sheet, why is a balance sheet important, balance sheet example, frequently asked questions (faqs).

When you’re starting a company, there are many important financial documents to know. It might seem overwhelming at first, but getting a handle on everything early will set you up for success in the future. Today, we’ll go over what a balance sheet is and how to master it to keep accurate financial records.

A balance sheet is a comprehensive financial statement that gives a snapshot of a company’s financial standing at a particular moment. A balance sheet covers a company’s assets as defined by its liabilities and shareholder equity.

Balance Sheet Time Periods

When investors ask for a balance sheet, they want to make sure it’s accurate to the current time period. They might want to see a past balance sheet as well. It’s important to keep accurate balance sheets regularly for this reason.

Assets are any resources your company owns that holds value. When setting up a balance sheet, you should order assets from current assets to long-term assets. Long-term assets can’t be converted immediately into cash on hand. They’re important to include, but they can’t immediately be converted into liquid capital.

There are a few different types of assets to list that your company probably has on-hand:

• Liquid assets: Cash and cash equivalents, such as certificates of deposit (CDs)
• Accounts receivable (A/R): Money owed to your company
• Marketable securities: Liquid assets that are readily convertible into cash (generally reported under cash and cash equivalents)
• Inventory: Any products you have available for sale
• Prepaid expenses: Rent, insurance and contracts with vendors

These are examples of long-term assets:

• Investments or securities that can’t be liquidated within the next year
• Fixed assets: Land, machinery and buildings
• Intangible assets: Intellectual property, brand awareness and company reputation

Want more information? Here’s everything you need to know about assets .

Liabilities

A liability is money that your company owes to any outside entity. Liabilities refer to basic aspects of your business: taking in money, loans, providing services and everything else your business does.

Liabilities are categorized as current and long-term as well. Current liabilities are customer prepayments for which your company needs to provide a service, wages, debt payments and more.

On the other hand, long-term liabilities are long-term debts like interest and bonds, pension funds and deferred tax liability.

Shareholder Equity

Finally, shareholder equity refers to your company’s net assets. The shareholder equity comprises the following:

• Money generated by a company
• Money put into the business by its owners and shareholders
• Any other capital put into the business

You can calculate total equity by subtracting liabilities from your company’s total assets.

When creating a balance sheet, start with two sections to make sure everything is matching up correctly. On one side, you’ll have the business’s assets. On the other side, you’ll put the company’s liabilities and shareholder equity.

The numbers should match up exactly: the total assets must be equal to the liabilities and shareholder assets. If these numbers aren’t the same, there might be an issue with your calculations or a missing asset or liability. Before sharing with any possible investors, make sure to check over your balance sheet several times.

Balance sheets are important because they give a picture of your company’s financial standing. Before getting a business loan or meeting with potential investors, a company has to provide an up-to-date balance sheet. A potential investor or loan provider wants to see that the company is able to keep payments on time.

Department heads can also use a balance sheet to understand the financial health of the company. Looking at the balance sheet and its components helps them keep track of important payments and how much cash is available on hand to pay these vendors.

Overall, a balance sheet is an important statement of your company’s financial health, and it’s important to have accurate balance sheets available regularly.

This is an example of a basic balance sheet and what’s included.

Download Balance Sheet Example

In this example, the imagined company had its total liabilities increase over the time period between the two balance sheets and consequently the total assets decreased.

Bottom Line

A balance sheet is a financial document that you should work on calculating regularly. If there are discrepancies, that means you’re missing important information for putting together the balance sheet.

Why do we need a balance sheet?

The balance sheet is a report that gives a basic snapshot of the company’s finances. This is an important document for potential investors and loan providers.

How do I calculate a balance sheet?

The formula is very basic: total assets = total liabilities + total equity. If you have questions about the individual components of the balance sheet, you might have to consult a finance expert.

What is the best accounting software for small businesses?

There are a number of high-quality accounting software solutions available. The overall best include OnPay, Gusto and QuickBooks. To find out which is the right option for your business, check out our article detailing the best accounting software for small businesses .

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Balance Sheet

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 17, 2023

Get Any Financial Question Answered

Table of contents, what is a balance sheet.

A balance sheet is a financial statement that shows the relationship between assets , liabilities , and shareholders’ equity of a company at a specific point in time.

Measuring a company’s net worth, a balance sheet shows what a company owns and how these assets are financed, either through debt or equity .

Balance sheets are useful tools for individual and institutional investors, as well as key stakeholders within an organization, as they show the general financial status of the company.

It is also possible to grasp the information found in a balance sheet to calculate important company metrics, such as profitability, liquidity, and debt-to-equity ratio.

However, it is crucial to remember that balance sheets communicate information as of a specific date. Naturally, a balance sheet is always based upon past data.

While stakeholders and investors may use a balance sheet to predict future performance, past performance does not guarantee future results.

In order to see the direction of a company, you will need to look at balance sheets over a time period of months or years.

How Balance Sheets Work

A balance sheet is guided by the accounting equation:

Both parts should be equal to each other or balance each other out. This means that the assets of a company should equal its liabilities plus any shareholders’ equity that has been issued. Hence, a balance sheet should always balance.

For instance, if a company takes out a ten-year, $8,000 loan from a bank, the assets of the company will increase by $8,000. Its liabilities will also increase by $8,000, balancing the two sides of the accounting equation .

If the company takes $10,000 from its investors, its assets and stockholders’ equity will also increase by that amount.

The revenues of the company in excess of its expenses will go into the shareholder equity account.

These revenues will be balanced on the asset side of the equation, appearing as inventory, cash , investments , or other assets.

Components of a Balance Sheet

A balance sheet has three primary components: assets, liabilities, and shareholders’ equity.

Assets are anything the company owns that holds some quantifiable value, which means that they could be liquidated and turned into cash.

These can include cash, investments, and tangible objects.

Companies divide their assets into two categories: current assets and noncurrent (long-term) assets.

Current Assets

Current assets are typically those that a company expects to convert easily into cash within a year.

These assets include cash and cash equivalents, prepaid expenses, accounts receivable, marketable securities, and inventory.

Non-Current Assets

Noncurrent assets are long-term investments that the company does not expect to convert into cash within a year or have a lifespan of more than one year.

Noncurrent assets include tangible assets , such as land, buildings, machinery, and equipment.

They can also be intangible assets, such as trademarks, patents, goodwill, copyright , or intellectual property.

Liabilities

Liabilities are anything a company owes. These are loans, accounts payable, bonds payable, or taxes.

Like assets, liabilities can be classified as either current or noncurrent liabilities.

Current Liabilities

Current liabilities refer to the liabilities of the company that are due or must be paid within one year.

This may include accounts payables, rent and utility payments, current debts or notes payables, current portion of long-term debt, and other accrued expenses.

Noncurrent Liabilities

Noncurrent or long-term liabilities are debts and other non-debt financial obligations that a company does not expect to repay within one year from the date of the balance sheet.

This may include long-term loans, bonds payable, leases, and deferred tax liabilities.

Shareholder’s Equity

Shareholder’s equity is the net worth of the company and reflects the amount of money left over if all liabilities are paid, and all assets are sold.

Shareholders’ equity belongs to the shareholders, whether public or private owners.

Retained Earnings

Shareholders’ equity reflects how much a company has left after paying its liabilities.

If the company wanted to, it could pay out all of that money to its shareholders through dividends . However, the company typically reinvests the money into the company.

Retained earnings are the money that the company keeps.

Share Capital

Share capital is the value of what investors have invested in the company.

For instance, if someone invests $200,000 to help you start a company, you would count that $200,000 in your balance sheet as your cash assets and as part of your share capital.

Stocks can be common or preferred stocks .

Common stock is those that people get when they buy stock through the stock market . Preferred stock, on the other hand, provides the shareholder with a greater claim on the company’s assets and earnings.

You can also see treasury stock on a balance sheet. This stock is a previously outstanding stock that is purchased from stockholders by the issuing company.

Example of a Balance Sheet

Below is an example of a balance sheet of Tesla for 2021 taken from the U.S. Securities and Exchange Commission .

As you can see, it starts with current assets, then the noncurrent, and the total of both.

Below the assets are the liabilities and stockholders’ equity, which include current liabilities, noncurrent liabilities, and shareholders’ equity.

For example, this balance sheet tells you:

• The reporting period ends December 31, 2021, and compares against a similar reporting period from the year prior.
• The assets of the company total $62,131, including $27,100 in current assets and $35,031 in noncurrent assets.
• The liabilities of the company total $30,548, including $19,705 in current liabilities and $10,843 in noncurrent liabilities.
• The company retained $331 in earnings during the reporting period, greatly less than the same period a year prior.
• Adhering to the accounting equation, a balance is obtained by the total assets of $62,131 and the combined total liabilities and stockholders’ equity which is $62,131.

It is crucial to note that how a balance sheet is formatted differs depending on where the company or organization is based.

How to Prepare a Balance Sheet

The balance sheet is prepared using the following steps:

Step 1: Determine the Reporting Date and Period

The balance sheet previews the total assets, liabilities, and shareholders’ equity of a company on a specific date, referred to as the reporting date.

Often, the reporting date will be the final day of the reporting period. Companies that report annually, like Tesla, often use December 31st as their reporting date, though they can choose any date.

There are also companies, like publicly traded ones, that will report quarterly. For this case, the reporting date will usually fall on the last day of the quarter:

• Q1: March 31
• Q2: June 30
• Q3: September 30
• Q4: December 31

However, it is common for a balance sheet to take a few days or weeks to prepare after the reporting period has ended.

Step 2: Identify Your Assets

You will need to tally up all your assets of the company on the balance sheet as of that date. This will include both current and noncurrent assets.

Assets are typically listed as individual line items and then as total assets in a balance sheet.

This will make it easier for analysts to comprehend exactly what your assets are and where they came from. Tallying the assets together will be required for final analysis.

Step 3: Identify Your Liabilities

Like assets, you need to identify your liabilities which will include both current and long-term liabilities.

Again, these should be organized into both line items and total liabilities. They should also be both subtotaled and then totaled together.

Step 4: Calculate Shareholders’ Equity

After you have assets and liabilities, calculating shareholders’ equity is done by taking the total value of assets and subtracting the total value of liabilities.

Shareholders’ equity will be straightforward for companies or organizations that a single owner privately holds.

The calculation may be complicated for publicly held companies depending on the various types of stock issued.

Line items in this section include common stocks, preferred stocks, share capital, treasury stocks, and retained earnings.

Step 5: Add Total Liabilities to Total Shareholders’ Equity and Compare to Assets

Adding total liabilities to shareholders’ equity should give you the same sum as your assets. If not, then there may be an error in your calculations.

Causes of a balance sheet not truly balancing may be:

• Errors in inventory
• Incorrectly entered transactions
• Incomplete or misplaced data
• Miscalculated loan amortization or depreciation
• Errors in currency exchange rates
• Miscalculated equity calculations

How to Analyze a Balance Sheet

Financial ratio analysis is the main technique to analyze the information contained within a balance sheet.

It uses formulas to obtain insights into a company and its operations.

Using financial ratios in analyzing a balance sheet, like the debt-to-equity ratio, can produce a good sense of the financial condition of the company and its operational efficiency.

It is crucial to remember that some ratios will require information from more than one financial statement, such as from the income statement and the balance sheet.

There are two types of ratios that use data from a balance sheet. These are:

Financial Strength Ratios

Financial strength ratios can provide investors with ideas of how financially stable the company is and whether it finances itself.

It also yields information on how well a company can meet its obligations and how these obligations are leveraged.

Financial strength ratios can include the working capital and debt-to-equity ratios.

Activity Ratios

Activity ratios mainly focus on current accounts to reveal how well the company manages its operating cycle .

These operating cycles can include receivables, payables, and inventory.

Examples of activity ratios are inventory turnover ratio, total assets turnover ratio, fixed assets turnover ratio, and accounts receivables turnover ratio.

These ratios can yield insights into the operational efficiency of the company.

Importance of a Balance Sheet

There are a few key reasons why a balance sheet is important. Here are a few of them:

Balance Sheets Examine Risk

A balance sheet lists all assets and liabilities of a company.

With this information, a company can quickly assess whether it has borrowed a large amount of money, whether the assets are not liquid enough, or whether it has enough current cash to fulfill current demands.

Balance Sheets Secure Capital

A lender will usually require a balance sheet of the company in order to secure a business plan.

Additionally, a company must usually provide a balance sheet to private investors when planning to secure private equity funding.

These are some of the cases in which external parties want to assess and check a company’s financial stability and health, its creditworthiness, and whether the company will be able to settle its short-term debts.

Balance Sheets are Needed for Financial Ratios

Business owners use these financial ratios to assess the profitability, solvency, liquidity , and turnover of a company and establish ways to improve the financial health of the company.

Some financial ratios need data and information from the balance sheet.

Balance Sheets Lure and Retain Talents

Good and talented employees are always looking for stable and secure companies to work in.

Balance sheets that are disclosed from public companies allow employees a chance to review how much the company has on hand and whether the financial health of the company is in accordance with their expectations from their employers.

Limitations of a Balance Sheet

Although balance sheets are important financial statements, they do have their limitations. Here are some of them:

Balance Sheets are Static

It may not provide a full snapshot of the financial health of a company without data from other financial statements.

In order to get a complete understanding of the company, business owners and investors should review other financial statements, such as the income statement and cash flow statement.

Balance Sheets Have a Narrow Scope of Timing

The balance sheet only reports the financial position of a company at a specific point in time.

This may not provide an accurate portrayal of the financial health of a company if the market conditions rapidly change or without knowledge of previous cash balance and understanding of industry operating demands.

Balance Sheets May Be Susceptible to Errors and Fraud

The data and information included in a balance sheet can sometimes be manipulated by management in order to present a more favorable financial position for the company.

Businesses should be wary of companies that have large discrepancies between their balance sheets and other financial statements.

It is also helpful to pay attention to the footnotes in the balance sheets to check what accounting systems are being used and to look out for red flags.

Balance Sheets Are Subject to Several Professional Judgment Areas That Could Impact the Report

For instance, accounts receivable should be continually assessed for impairment and adjusted to reveal potential uncollectible accounts.

A company should make estimates and reflect their best guess as a part of the balance sheet if they do not know which receivables a company is likely actually to receive.

Balance Sheets vs. Income Statements

Here are some key differences between balance sheets and income statements:

The Bottom Line

Balance sheets are important financial statements that provide insights into the assets, liabilities, and shareholders’ equity of a company.

It is helpful for business owners to prepare and review balance sheets in order to assess the financial health of their companies.

Balance sheets also play an important role in securing funding from lenders and investors. Additionally, it helps businesses to retain talents.

Although balance sheets are important, they do have their limitations, and business owners must be aware of them.

Some of its limitations are that it is static, has a narrow scope of timing, and is subject to errors and frauds.

A balance sheet is also different from an income statement in several ways, most notably the time frame it covers and the items included.

It is important to understand that balance sheets only provide a snapshot of the financial position of a company at a specific point in time.

In order to get a more accurate understanding of the company, business owners and investors should review other financial statements, such as the income statement and cash flow statement.

Balance Sheet FAQs

What is included in the balance sheet.

Balance sheets include assets, liabilities, and shareholders' equity. Assets are what the company owns, while liabilities are what the company owes. Shareholders' equity is the portion of the business that is owned by the shareholders.

Who prepares the balance sheet?

The balance sheet is prepared by the management of the company. The auditor of the company then subjects balance sheets to an audit. Balance sheets of small privately-held businesses might be prepared by the owner of the company or its bookkeeper. On the other hand, balance sheets for mid-size private firms might be prepared internally and then reviewed over by an external accountant.

What is the balance sheet formula?

The balance sheet equation is: Assets = Liabilities + Shareholders' Equity

What is the purpose of the balance sheet?

The balance sheet is used to assess the financial health of a company. Investors and lenders also use it to assess creditworthiness and the availability of assets for collateral.

How often are balance sheets required?

Balance sheets are typically prepared at the end of set periods (e.g., annually, every quarter). Public companies are required to have a periodic financial statement available to the public. On the other hand, private companies do not need to appeal to shareholders. That is why there is no need to have their financial statements published to the public.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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How to write a balance sheet for a business plan

Table of Contents

What is a balance sheet?

Elements of a balance sheet, liabilities, how to write a balance sheet, manage your business finances with countingup.

A balance sheet is one of three major financial statements that should be in a business plan – the other two being an income statement and cash flow statement .  

Writing a balance sheet is an essential skill for any business owner. And while business accounting can seem a little daunting at first, it’s actually fairly simple. 

To help you write the perfect balance sheet for your business plan, this guide covers everything you need to know, including:

• What are assets?
• What are liabilities?
• What is equity?

A balance sheet is a financial statement that shows a business’ “book value”, or the value of a company after all of its debts are paid. 

For those inside the business, it provides valuable financial insights, allowing the owners to assess their current financial situation and plan for the future. 

For external investors, a balance sheet lets them know whether it’s a worthwhile investment.  

Putting a balance sheet together isn’t all that difficult. You just need to know the value of three things:

• Owner’s equity

Once you know these three figures, there’s just a little bit of maths – nothing too scary though.

Assets are items or resources that have financial value. They might be physical items, machinery and vehicles, or they could be intangible items, like copyrights or brand identity .

Assets are separated into two groups based on how quickly you can turn them into cash. There are current assets and fixed assets. 

Current assets are things that are fairly simple to value and sell, such as:

• Stock and inventory
• Cash in the bank
• Money owed to you (through unpaid invoices )
• Customer deposits
• Office furniture, equipment or supplies
• Phones or laptops
• Even relatively trivial items like a coffee machine or pool table

Fixed assets are valuable items that take much longer to sell, such as:

• Property or buildings
• Specialised equipment for your business operations
• Investments
• Vehicles 

On your balance sheet, the asset column is the simplest. All you need to do is list each item your business owns, along with their individual values, in a separate column. Then, add up the values to get a total at the bottom. 

Liabilities are the funds that you owe to other people, banks, or businesses. They can be:

• A business loan (the total, not the monthly payment amount)
• A mortgage or rent payment on a property
• Supplier contracts you owe
• Your accounts payable total
• Other financial obligations, such as paying wages or freelancers for support
• Taxes you’ll owe to HMRC

List these in the same way you did with your assets – on a spreadsheet with their values in a separate column. 

When you know the value of your assets and liabilities, working your equity is simple – it’s just the total value of your assets, minus the total value of your liabilities. 

Record the owner’s equity in the same column as your liabilities. When you add them all up, it should be the same value as your assets. 

After you’ve totalled up your assets, liabilities, and owner’s equity, all that’s left to do is fill in your balance sheet. 

Using a spreadsheet, record your assets on the left and your liabilities and owner’s equity on the right. 

For example, here’s what a balance sheet might look like for a painter and decorator:

If you’ve recorded everything correctly, both sides should have the same total. Whenever you make a change, the balance sheet will change, but it should still be balanced. 

For example, let’s say our painter and decorator sold their equipment. In that case, they’d lose an asset worth £200, but they’d also gain £200 in cash, so the asset total would stay the same. 

Alternatively, let’s say they lost the equipment altogether and got no money for it. In that case, they’d lose £200, leaving their asset total at £5,600. Then, they’d have to adjust the other side, so it remains balanced, like this:

If your two totals are not balanced, it’s most likely for one of these reasons:

• Incomplete or missing information
• Incorrect data entry
• A mistake in exchange rates
• And inventory miscount

Basically, if things don’t look right, try not to panic. It’s normally a simple mistake, so go over the figures again and you’ll find the culprit. 

The trickiest part of writing a balance sheet for a business plan is accurately recording financial information. 

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Understanding a Balance Sheet (With Examples and Video)

Frances McInnis

Reviewed by

May 3, 2024

This article is Tax Professional approved

Balance sheets can help you see the big picture: the net worth of your small business, how much money you have, and where it’s kept. They’re also essential for getting investors, securing a loan , or selling your business.

So you definitely need to know your way around one. That’s where this guide comes in. We’ll walk you through balance sheets, one step at a time.

I am the text that will be copied.

What is a balance sheet?

The balance sheet is one of the three main financial statements , along with the income statement and cash flow statement .

While income statements and cash flow statements show your business’s activity over a period of time, a balance sheet gives a snapshot of your financials at a particular moment. It incorporates every journal entry since your company launched. Your balance sheet shows what your business owns (assets), what it owes (liabilities) , and what money is left over for the owners ( owner’s equity ).

Because it summarizes a business’s finances, the balance sheet is also sometimes called the statement of financial position. Companies usually prepare one at the end of a reporting period, such as a month, quarter, or year.

The purpose of a balance sheet

Because the balance sheet reflects every transaction since your company started, it reveals your business’s overall financial health. Investors, business owners, and accountants can use this information to give a book value to the business, but it can be used for so much more.

At a glance, you’ll know exactly how much money you’ve put in, or how much debt you’ve accumulated. Or you might compare current assets to current liabilities to make sure you’re able to meet upcoming payments.

The information in your company’s balance sheet can help you calculate key financial ratios, such as the debt-to-equity ratio, a metric which shows the ability of a business to pay for its debts with equity (should the need arise). Even more immediately applicable is the current ratio : current assets / current liabilities. This will tell you whether you have the ability to pay all your debts in the next 12 months.

You can also compare your latest balance sheet to previous ones to examine how your finances have changed over time. You’ll be able to see just how far you’ve come since day one.

A simple balance sheet template

You can download a simple balance sheet template here . You record the account name on the left side of the balance sheet and the cash value on the right.

What goes on a balance sheet

At a high level, a balance sheet works the same way across all business types. They are organized into three categories: assets, liabilities, and owner’s equity.

Let’s start with assets—the things your business owns that have a dollar value.

List your assets in order of liquidity , or how easily they can be turned into cash, sold or consumed. Bank accounts and other cash accounts should come first followed by fixed assets or tangible assets like buildings or equipment with a useful life longer than a year. Even intangible assets like intellectual properties, trademarks, and copyrights should be included. Anything you expect to convert into cash within a year are called current assets.

Current assets include:

• Money in a checking account
• Money in transit (money being transferred from another account)
• Accounts receivable (money owed to you by customers)
• Short-term investments
• Prepaid expenses
• Cash equivalents (currency, stocks, and bonds)

Long-term assets (or non-current assets), on the other hand, are things you don’t plan to convert to cash within a year.

Long-term assets include:

• Buildings and land
• Machinery and equipment (less accumulated depreciation )
• Intangible assets like patents, trademarks, copyrights, and goodwill (you would list the market value of what fair price a buyer might purchase these for)
• Long-term investments

Let’s say you own a vegan catering business called “Where’s the Beef”. As of December 31, your company assets are: money in a checking account, an unpaid invoice for a wedding you just catered, and cookware, dishes and utensils worth $900. Here’s how you’d list your assets on your balance sheet:

Liabilities

Next come your liabilities—your business’s financial obligations and debts.

List your liabilities by their due date. Just like assets, you’ll classify them as current liabilities (due within a year) and non-current liabilities (the due date is more than a year away). These are also known as short-term liabilities and long-term liabilities.

Your current liabilities might include:

• Accounts payable (what you owe suppliers for items you bought on credit)
• Wages you owe to employees for hours they’ve already worked
• Loans that you have to pay back within a year
• Credit card debt

And here are some non-current liabilities:

• Loans that you don’t have to pay back within a year
• Bonds your company has issued

Returning to our catering example, let’s say you haven’t yet paid the latest invoice from your tofu supplier. You also have a business loan, which isn’t due for another 18 months.

Here are Where’s the Beef’s liabilities:

Equity is money currently held by your company. This category is usually called “owner’s equity” for sole proprietorships and “stockholders’ equity” or “shareholders’ equity” for corporations. It shows what belongs to the business owners and the book value of their investments (like common stock, preferred stock, or bonds).

Owners’ equity includes:

• Capital (the amount of money invested into the business by the owners)
• Private or public stock
• Retained earnings (all your revenue minus all your expenses and distributions since launch)

Equity can also drop when an owner draws money out of the company to pay themself, or when a corporation issues dividends to shareholders.

For Where’s the Beef, let’s say you invested $2,500 to launch the business last year, and another $2,500 this year. You’ve also taken $9,000 out of the business to pay yourself and you’ve left some profit in the bank.

Here’s a summary of Where’s the Beef’s equity:

The balance sheet equation

This accounting equation is the key to the balance sheet:

Assets = Liabilities + Owner’s Equity

Assets go on one side, liabilities plus equity go on the other. The two sides must balance—hence the name “balance sheet.”

It makes sense: you pay for your company’s assets by either borrowing money (i.e. increasing your liabilities) or getting money from the owners (equity).

A sample balance sheet

We’re ready to put everything into a standard template ( you can download one here ). Here’s what a sample balance sheet looks like, in a proper balance sheet format:

Nice. Your balance sheet is ready for action.

Great. Now what do I do with it?

Because the balance sheet reflects every transaction since your company started, it reveals your business’s overall financial health. At a glance, you’ll know exactly how much money you’ve put in, or how much debt you’ve accumulated. Or you might compare current assets to current liabilities to make sure you’re able to meet upcoming payments.

You can also compare your latest balance sheet to previous ones to examine how your finances have changed over time. You’ll be able to see just how far you’ve come since day one. If you need help understanding your balance sheet or need help putting together a balance sheet, consider hiring a bookkeeper .

Here’s some metrics you can calculate using your balance sheet:

• Debt-to-equity ratio (D/E ratio): Investors and shareholders are interested in the D/E ratio of a company to understand whether they raise money through investment or debt. A high D/E ratio shows a business relies heavily on loans and financing to raise money.
• Working capital : This metric shows how much cash you would hold if you paid off all your debts. It signals to investors and lenders how capable you are to pay down your current liabilities.
• Return on Assets: A formula for calculating how much net income is being earned relative to the assets owned. The more income earned relative to the amount of assets, the higher performing a business is considered to be.

Next, we’ll cover the three most important ratios that you can calculate using your balance sheet: the current ratio, the debt-to-equity ratio, and the quick ratio.  

The current ratio

Can your company pay its debts? The current ratio measures the liquidity of your company—how much of it can be converted to cash, and used to pay down liabilities. The higher the ratio, the better your financial health in terms of liquidity .

The ratio for finding your current ratio looks like this:

Current Ratio = Current Assets / Current Liabilities

You should aim to maintain a current ratio of 2:1 or higher. Meaning, your company holds twice as much value in assets as it does in liabilities. If you had to, you could pay off all the money you owe two times over.

Once you drop below a current ratio of 2:1, your liquidity isn’t looking so good. And if you dip below 1:1, you’re entering hot water. That means you don’t have enough liquidity to pay off your debts.

You can improve your current ratio by either increasing your assets or decreasing your liabilities.

The quick ratio

Also called the acid test ratio, the quick ratio describes how capable your business is of paying off all its short-term liabilities with cash and near-cash assets. In this case, you don’t include assets like real estate or other long-term investments. You also don’t include current assets that are harder to liquidate, like inventory. The focus is on assets you can easily liquidate.

Here’s how you get the quick ratio:

Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities

If your ratio is 1:1 or better, you’re sitting pretty. That means you’ve got enough quick-to-liquidate assets to cover all your short term liabilities in a pinch.

The debt-to-equity ratio

Similar to the current ratio and quick ratio, the debt-to-equity ratio measures your company’s relationship to debt. Only, in this case, the key value is your total equity.

This ratio tells you how much your company depends upon equity to keep running versus how much it depends on outside lenders. It’s calculated like this:

Debt to Equity Ratio = Total Outside Liabilities / Owner or Shareholders’ Equity

Generally speaking, a 2:1 ratio is considered acceptable. If the ratio gets bigger, you start running into trouble. It means your business relies heavily on debt to keep running, which turns off investors. The higher the ratio, the higher the chance that, in the event you need to pay off your debt, you’ll use up all your earnings and cash flows—and investors will end up empty-handed.

Examples of balance sheet analysis

We’ll do a quick, simple analysis of two balance sheets, so you can get a good idea of how to put financial ratios into play and measure your company’s performance.

Annie’s Pottery Palace, a large pottery studio, holds a lot of its current assets in the form of equipment—wheels and kilns for making pottery. Accounts receivable play a relatively minor role.

Liabilities are few—a small loan to pay off within the year, some wages owed to employees, and a couple thousand dollars to pay suppliers.

Annie’s is a single-member LLC—there are no shareholders, so her equity includes only her initial investment, retained earnings, and Annie’s draw($4,000).

Ratio analysis:

Current ratio: 22,000 / 7,000 = 3.14:1

Annie’s current ratio is very healthy. If necessary, her current assets could pay off her current liabilities more than three times over.

Quick ratio: 6,000 / 7,000 = 0.85:1

Her quick ratio isn’t looking so hot, though. Annie’s currently sitting just below 1:1, meaning she wouldn’t be able to quickly pay off debt.

Debt-to-equity ratio: 7,000 / 15,000 = 0.46:1

Annie’s debt-to-equity looks good. She’s got more than twice as much owner’s equity than she does outside liabilities, meaning she’s able to easily pay off all her external debt.

Final analysis:

Annie is able to cover all of her liabilities comfortably—until we take her equipment assets out of the picture. Most of her assets are sunk in equipment, rather than quick-to-cash assets. With this in mind, she might aim to grow her easily liquidated assets by keeping more cash on hand in the business checking account.

That being said, her owner’s equity is more than capable of covering her debt, so this problem shouldn’t be difficult to fix. It would be wise for Annie to take care of it before applying for loans or bringing on investors.

Example balance sheet analysis: Bill’s Book Barn LTD.

A lot of Bill’s assets are tied up in inventory—his large collection of books. The rest mostly consists of long-term investments and intangible assets. (Bill’s Book Barn is famous among collectors of rare fly-tying manuals; a business consultant valued his list of dedicated returning customers at $10,000.)

He doesn’t have a lot of liabilities compared to his assets, and all of them are short-term liabilities. Meaning, he’ll need to pay off that $17,000 within a year.

Finally, since Bill is incorporated, he has issued shares of his business to his brother Garth. Currently, Garth holds a $12,000 share in the business, a little shy of half its total equity.

Ratio analysis

Current ratio: 30,000 / 17,000 = 1.76:1

Since long-term investments and intangible assets are tough to liquidate, they’re not included in current assets—meaning Bill has $30,000 in assets he can more or less easily use to cover his liabilities. His ratio of 1.76:1 isn’t great—it doesn’t leave much wiggle room if he wants to pay off his liabilities. But it isn’t terrible, either—he’s just shy of a healthy 2:1 ratio.

Quick ratio: 7,000 / 17,000 = 0.41:1

Bill’s quick ratio is pretty dire—he’s well short of paying off his liabilities with cash and cash equivalents, leaving him in a bind if he needs to take care of that debt ASAP.

Debt-to-equity ratio: 17,000 / 15,000 = 1.13:1

Once we take into account his $13,000 owner’s draw, Bill’s owner’s equity comes to just $15,000, shy of his $17,000 in debt. Remember, an acceptable debt-to-equity ratio is 2:1. Bill is falling short of acceptable; if he had to pay off all his debts quickly, his equity wouldn’t cover it, and he’d need to dip into his company’s income. That makes his business unattractive to potential investors. Unless he changes course, Bill will have trouble getting financing for his business in the future.

Summary Analysis

Bill’s ratios don’t look great, but there’s hope. If he starts liquidating some of his long-term investments now, he can bump his current ratio up to 2:1, meaning he’d be in a healthy position to pay off liabilities with his current assets.

His quick ratio will take more work to improve. A lot of Bill’s assets are tied up in inventory. If he could convert some of that inventory to cash, he could improve his ability to pay of debt quickly in an emergency. He may want to take a look at his inventory, and see what he can liquidate. Maybe he’s got shelves full of books that have been gathering dust for years. If he can sell them off to another bookseller as a lot, maybe he can raise the $10,000 cash to become more financially stable.

Finally, unless he improves his debt-to-equity ratio, Bill’s brother Garth is the only person who will ever invest in his business. The situation could be improved considerably if Bill reduced his $13,000 owner’s draw. Unfortunately, he’s addicted to collecting extremely rare 18th century guides to bookkeeping. Until he can get his bibliophilia under control, his equity will continue to suffer.

Balance sheets can tell you a lot of information about your business, and help you plan strategically to make it more liquid, financially stable, and appealing to investors. But unless you use them in tandem with income statements and cash flow statements, you’re only getting part of the picture. Learn how they work together with our complete guide to financial statements .

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What is a balance sheet and why is it important?

Cnbc select talks about what a balance sheet is and it's utility as a financial statement.

A balance sheet is a versatile document that offers a snapshot of a company's or individual's finances at a given point in time. Businesses can use balance sheets to develop plans for the future and present a picture of their financial health to investors or other outside entities. You can also generate a personal balance sheet to get a concise view of your assets and liabilities. Here, CNBC Select explains what a balance sheet is, how to create one and how it can be useful to both companies and individuals.

What we'll cover

What is a balance sheet.

• How a balance sheet works

Why balance sheets are important

How to make a personal balance sheet, bottom line.

A balance sheet, also known as a statement of net worth , is a summary of a company's financial status at a specific point in time. It presents all assets and liabilities, as well as any investments from shareholders. It is one of the three primary financial statements all companies are required to have by law, along with an income statement and a statement of cash flows.

Because it uses archival data, a balance sheet only presents a snapshot of a company's financial situation. While it's a critical tool, it can't guarantee future performance.

How does a balance sheet work?

A balance sheet uses a formula that equates a company's assets with its liabilities plus its shareholder equity. The equation should always be in "balance," with the two sides equal. Here's what each aspect of the balance sheet equation represents:

• Assets: Assets are resources with quantifiable value, such as cash, inventory or money the company is owed. They are often split into current assets — bank accounts, inventory and other things that could easily be converted into cash — and fixed assets — buildings, machinery, long-term loans to customers and other things that will stay on the books longer. (Intellectual property can also be included as a fixed asset.)
• Liabilities: Essentially the opposite of an asset, a liability is something the company owes, usually a sum of money. They are divided into short-term liabilities — like salaries, rent and money owed to other companies — and long-term liabilities , like mortgages, larger loans and long-term leases.
• Shareholder equity: This is a company's net worth — essentially what would be left if the business had to liquidate its assets and pay off all its debts. It most commonly takes the form of stocks and retained earnings (money the company earned but hasn't distributed to investors), but also includes any capital investments. Analysts and investors can use shareholder equity to judge a company's financial well-being.

While there can be nuances regarding the classification of certain assets or liabilities, a balance sheet is still a good way to determine a company's financial health at a given point in time.

In a corporation, a balance sheet lets stakeholders know if the business is solvent, meaning the value of its assets is higher than the total of its liabilities. It can also pinpoint areas where the company is underperforming.

Externally, a balance sheet lets potential investors, clients and other businesses know if a company is solvent. Did it borrow more money than it should have? Are its liabilities higher than the industry average? Is the available cash on hand higher or lower than normal? While you'll most often hear about balance sheets in the context of business, they can also help individuals take stock of their finances and make informed purchasing and investing decisions.

You can also use a balance sheet to quickly determine several key financial measurements:

• The current ratio , the current assets divided by current liabilities, illustrates a company's ability to pay off debts over the next 12 months.
• A quick ratio indicates a company's ability to pay off debt right away. It's determined by dividing liquid assets (cash/cash equivalents + short-term investments + accounts receivable) by current liabilities. The quick ratio is often the same as the current ratio.
• There is also the debt-to-equity ratio , or "risk ratio." It's a company's total liabilities divided by its total equity. This metric reveals how much of a business is financed by debt. If a company is highly leveraged, it can make it hard to get additional financing.

The formula for a personal balance sheet is similar to one for a business, only without shareholder equity. Essentially, your net worth is equal to your assets minus your liabilities, or debts. To create a personal balance sheet, start by collecting relevant financial records from your bank, investment companies and creditors. Using a personal finance app, such as You Need A Budget (YNAB) , can be helpful during this kind of deep dive. YNAB syncs with your bank and investment accounts, allowing you to assign funds to different life categories to better help you visualize your finances.

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Now, tally up your assets. This includes money in checking accounts , savings accounts and retirement funds, as well as your car or home (if you own them outright) and valuables like jewelry, art or collectibles. Then work on identifying your liabilities, or outstanding debts. Common ones include mortgages, student loans, car payments and credit card bills.

Once you've listed both, subtract your liabilities from your assets. The resulting figure is your net worth. If the amount is lower than you would like, or even negative, remember that this is just a snapshot of your current status. You now have information that can help you address your financial situation.

For instance, if you see you've accumulated a substantial amount of credit card debt , you could consider applying for a balance transfer credit card like the Wells Fargo Reflect® Card , which has a 0% intro APR for 21 months from account opening on purchases and qualifying balance transfers. Balance transfers made within 120 days qualify for the intro rate, BT fee of 5%, min: $5. If you kept up with payments, you could chip away at your debt without being buried under a high interest rate.

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Who needs a balance sheet?

A balance sheet is a key financial tool for business owners, executives, analysts and anyone who wants a clear picture of a company's current monetary position.

What does a balance sheet show?

A balance sheet gives an overview of a company's financial position by taking stock of what it owns, what it owes and the value of its equity.

What doesn't appear on a balance sheet?

There are a few things a balance sheet won't show you, including cash flow, profits and losses and the fair market value of assets such as land.

Can a balance sheet be negative?

A balance sheet can contain negative values, most commonly when a business is spending more than it is making. But the basic formula — assets = liabilities + shareholders' equity — should always balance out.

Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox.  Sign up here .

Businesses use balance sheets to indicate their financial standing. They can also be used by individuals or households to get a high-level view of their current wealth and identify areas for improvement.

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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products . While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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Balance Sheet: Definition, Uses and How to Create One

Billie Anne is a freelance writer who has also been a bookkeeper since before the turn of the century. She is a QuickBooks Online ProAdvisor, LivePlan Expert Advisor, FreshBooks Certified Partner and a Mastery Level Certified Profit First Professional. She is also a guide for the Profit First Professionals organization. In 2012, she started Pocket Protector Bookkeeping, a virtual bookkeeping and managerial accounting service for small businesses.

Rick VanderKnyff leads the news team at NerdWallet. Previously, he has worked as a channel manager at MSN.com, as a web manager at University of California San Diego, and as a copy editor and staff writer at the Los Angeles Times. He holds a Bachelor of Arts in communications and a Master of Arts in anthropology.

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The balance sheet summarizes your business's financial status as of a certain date. It follows the accounting equation: Assets = Liabilities + Owner's equity. In non-accounting terms, the balance sheet tells you what your business owns (assets), what it owes (liabilities), and what the owner's stake in the business is (equity).

If you think of your financial statements as the story of your business, then the balance sheet serves as the CliffsNotes version of that story. Every transaction in your business impacts the balance sheet in some way.

» MORE: Nine basic accounting concepts every business owner should know

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QuickBooks Online

What does a balance sheet include?

The balance sheet includes three broad categories of information:

Liabilities.

Owner's equity.

Assets are the things your business owns. Most balance sheets break down assets into two subcategories.

Current assets are cash, cash equivalents, and things that can be easily converted into cash within the next 12 months. Your bank accounts, petty cash, accounts receivable (amounts customers owe to you), and inventory are all examples of current assets.

Fixed assets are things your business owns that aren't likely to be converted into cash (sold) within a 12-month period. This includes land, buildings, heavy equipment, vehicles, and long-term loans to customers. Some businesses also have intangible assets, like trademarks and patents, listed under fixed assets on their balance sheets.

Liabilities

Liabilities are amounts your business owes to others. As with assets, most balance sheets break down liabilities into two subcategories.

Current liabilities are amounts you are likely to pay within the next 12 months. This includes amounts due to vendors for utilities and inventory (accounts payable), credit card balances, sales tax and payroll taxes you've collected but not yet submitted to the government, and the portion of loan balances due within the next 12 months. In addition, if you have a line of credit for your business, that will usually be listed as a current liability on your balance sheet.

Long-term liabilities are amounts due in the future beyond the next 12 months. This would include the mortgage on your building, vehicle loans, and long-term leases.

Equity balances out the difference between assets and liabilities. It is your stake in the business. You can also look at equity as the amount the business owes to you.

Equity consists of:

Contributions you have made to the business (startup cash you invested, additional paid-in capital, etc.)

Retained earnings (amounts you have left in the business over time.)

Capital and preferred stock, if your business has other shareholders.

The current year's net income (from your profit and loss statement).

Let's look back at the accounting equation the balance sheet follows:

Assets = Liabilities + Equity.

Another way to look at this equation is

Assets - Liabilities = Equity.

In other words, equity is what is left for the business owner after all the liabilities are paid from the business's assets. Equity will be negative if a business's liabilities exceed its assets. This means the business owner might have to use their own money to pay the business's debts if it closes immediately. Negative equity can also negatively impact the selling price of the business.

» MORE: Best accounting software for small businesses

What does a balance sheet exclude?

The balance sheet excludes detailed information about the business's income and expenses. Instead, this detail is included in the business's profit and loss statement.

But remember: Every transaction in your business impacts the balance sheet in some way. Your business's income and expenses are summarized on the balance sheet as Net Income under the Equity section.

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How can you make a balance sheet?

If your business is new and simple, you can create a manual balance sheet using the accounting formula. First, list your current bank account balances (assets), subtract any loans or amounts due to others (liabilities), and what is left is your equity in the business.

However, most businesses must rely on their accounting software to create an accurate balance sheet. The balance sheet is a standard report in all double-entry bookkeeping software.

To create a balance sheet in your accounting software, go to the reports section and look for financial reports. Since it is a common financial statement, the balance sheet should appear near the top of the list, often right after the profit and loss (or income) statement.

Some accounting software prompts you to enter a date range for the balance sheet report. This isn't wrong, per se, but it can be confusing. Unlike the profit and loss statement, which only shows information for a certain period, the balance sheet shows information as of a specific date. And that information includes a financial summary of your business from its start through the "as of" date on the balance sheet.

The purpose of the balance sheet

Before the advent of double-entry bookkeeping software, the balance sheet ensured the accuracy of a business's bookkeeping. For example, if the balance sheet was out of balance — meaning assets weren't equal to the combined value of liabilities and equity — then that indicated an error in the books.

Today's accounting software won't let you post an unbalanced transaction, so finding an out-of-balance balance sheet is rare. In fact, an unbalanced balance sheet usually indicates a technical problem inside the software. But that doesn't mean the balance sheet is obsolete. On the contrary, the balance sheet is an essential tool to help you — and potential investors — analyze your company's health at a glance and make sound business decisions.

» MORE: Chart of accounts: Definition, guide and examples

How the balance sheet can help you make business decisions

You can quickly analyze your business's financial health with a glance at the balance sheet. If equity is negative — meaning liabilities are greater than assets — that could indicate your business is in financial trouble. It would be best to meet with an accountant to discuss ways to increase your assets or decrease your liabilities, so your stake in the business is no longer negative.

If you want to go beyond a glance, you can quickly calculate three critical metrics from your business's balance sheet.

Current ratio

The current ratio measures your business's ability to pay your current liabilities. The formula is:

Current assets / Current liabilities = Current ratio

The current ratio tells you how many times your business can pay its current liabilities from the cash on hand. Anything less than 1 indicates your business does not have enough cash or cash equivalents to pay amounts due in the next 12 months.

Quick ratio

The quick ratio formula is:

(Cash & cash equivalents + Short-term investments + Accounts receivable) / Current liabilities = Quick ratio

The quick ratio is a measure of liquidity and is often the same as the current ratio.

Debt to equity ratio

The debt-to-equity ratio tells you how leveraged your business is or how much of your business is financed with debt. The formula is:

Total liabilities / Total equity = Debt-to-equity ratio

Notice that now we're looking at total liabilities — including long-term debt. A good debt-to-equity ratio is between 1 and 1.5. Anything higher than that can indicate your business is highly leveraged. This could make it harder to get financing at a favorable rate.

Other considerations

These ratios are good quick measurements of your business's performance in certain critical areas, but they don't tell the whole story. To make the best decisions for your business, you should review the balance sheet alongside the profit and loss statement and statement of cash flows. Enlisting the help of an accountant who knows your business and your industry is also key to using your balance sheet to make business decisions.

Business Plan Balance Sheet: Everything You Need to Know

Preparing a business plan balance sheet is an important part of starting your own business. 3 min read updated on February 01, 2023

Preparing a business plan balance sheet is an important part of starting your own business. The balance sheet serves as one of three crucial parts of the company's financials along with cash flow and the income statement. The basics of the balance sheet include a few straightforward parts:

• Company assets.
• Liabilities.
• Owner's equity.

The balance sheet will also include income and spending that isn't represented in the profit and loss statement. For example, it will show loan repayments and the purchase of new assets. Additionally, the money that is taken in as a new loan will not show up on the P & L either.

Accounts receivable, or the money you are waiting to receive from your customers, will show up as an asset on your balance sheet and as it is not yet reported as income on your P & L statement. A balance sheet is your business's representation of why your profits are not yet considered cash. It creates the broad financial picture of your business while the profit and loss statement will show the company's financial performance over a set length of time.

A balance sheet always has to balance. It will have assets on one side and liabilities and equity on the other. The basic formula that a balance sheet follows is Assets = Liabilities + Equity. In the end, it is the balance sheet that will show a company's net worth. To determine net worth at any given time, all you need to do is subtract the liabilities from the assets.

Balance sheets are used for planning and not accounting which is one of the principles of lean business planning. To get a useful cash flow projection, you will need to summarize the aggregate of the rows on the balance sheet. It is always important to look at a balance sheet as a tool to forecast your cash.

Components of a Balance Sheet

Just as one business will differ from another, so will the assets and liabilities of the business. Even though the titles will vary, the equation and goal remains the same. You will need to have your business assets equal your liabilities and equity .

The assets on your balance sheet will often be in order from the top to the bottom with how easy they can be converted to cash. This is called liquidity . Your most liquid assets will be on top and your least liquid on the bottom. Typically assets will be listed as follows:

• Cash — This is money currently on hands such as in checking and savings accounts. It can also include money market accounts that can be converted to cash quickly.
• Accounts Receivable — This represents money that is owed to you but has not actually been received yet. This is often credit that is extended to customers through invoicing.
• Inventory — This includes all the finished goods and materials that are ready at your place of business but has yet to be sold.
• Current Assets — These are assets that can be considered able to be converted into cash within a year or less. This includes all your cash, accounts receivable, and inventory which will all be grouped together as current assets.
• Long-Term Assets — These are fixed assets that have a long-standing value such as land and equipment. They cannot be converted to cash as quickly.
• Accumulated Depreciation — This is the value that your assets will be reduced over time due to depreciation.
• Long-Term Assets — This is the total of long-term assets plus depreciation.

Liabilities

Liabilities will be ordered for time it would take to pay them off, with current liabilities needing to be paid in a year or less and long-term liabilities longer than a year.

• Accounts Payable — This is the amount of money that your business will owe to vendors or for regular bills.
• Sales Tax Payable — If your sales tax is not paid right away, it will accrue in this account until payment is made.
• Short-Term Debt — This is usually short-term loans that will be repaid in less than a year.
• Total Current Liabilities — The total amount of debt that the business will need to pay back in a year.
• Long-Term Debt — This amount includes the financial responsibilities that will take more than a year to pay back.

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Balance Sheets 101: What Goes On a Balance Sheet?

• 09 Jun 2016

A balance sheet is one of the primary statements used to determine the net worth of a company and get a quick overview of its financial health. The ability to read and understand a balance sheet is a crucial skill for anyone involved in business, but it’s one that many people lack.

What Is a Balance Sheet?

A balance sheet provides a snapshot of a company’s financial performance at a given point in time. This financial statement is used both internally and externally to determine the so-called “book value” of the company, or its overall worth.

Balance sheets are typically prepared and distributed monthly or quarterly depending on the governing laws and company policies. Additionally, the balance sheet may be prepared according to GAAP or IFRS standards based on the region in which the company is located.

The balance sheet is just a more detailed version of the fundamental accounting equation—also known as the balance sheet formula—which includes assets , liabilities , and shareholders’ equity .

The Balance Sheet Equation

Balance sheets are typically organized according to the following formula:

Assets = Liabilities + Owners’ Equity

The formula can also be rearranged like so:

Owners’ Equity = Assets - Liabilities or Liabilities = Assets - Owners’ Equity

A balance sheet must always balance; therefore, this equation should always be true.

You’ve probably heard at least some of these terms before. But what do they actually mean and include? Let’s break it down. Below, we’ll explore what exactly goes on a balance sheet.

What Goes on a Balance Sheet?

The assets are the operational side of the company. Basically, a list of what the company owns . Everything listed is an item that the company has control over and can use to run the business.

The left side of the balance sheet is the business itself, including the buildings, inventory for sale, and cash from selling goods. If you were to take a clipboard and record everything you found in a company, you would end up with a list that looks remarkably like the left side of the balance sheet. The assets are what allow the company to run.

Assets can be further categorized as either current assets or fixed (non-current) assets. Some of the most common current assets include:

• Cash and cash equivalents
• Accounts receivable
• Short-term marketable securities

Common fixed or non-current assets include:

• Property and equipment
• Long-term marketable securities
• Intangible assets such as patents, licenses, and goodwill

Assets will typically be presented as individual line items, such as the examples above. Then, current and fixed assets are subtotaled and finally totaled together.

2. Liabilities

Liabilities and equity make up the right side of the balance sheet and cover the financial side of the company. This is a list of what the company owes. With liabilities, this is obvious—you owe loans to a bank, or repayment of bonds to holders of debt. The interest rates are fixed and the amounts owed are clear. Liabilities are listed at the top of the balance sheet because, in case of bankruptcy, they are paid back first before any other funds are given out.

Similar to assets, liabilities are categorized as current and non-current liabilities. Common current liabilities include:

• Accounts payable
• Salaries and wages payable
• Deferred revenue
• Commercial paper
• Accrued expenses
• Short-term debt

Non-current liabilities include:

• Long-term debt
• Long-term lease obligations

Liabilities are presented as line items, subtotaled, and totaled on the balance sheet.

Below liabilities on the balance sheet is equity, or the amount owed to the owners of the company. Since they own the company, this amount is intuitively based on the accounting equation—whatever assets are left over after the liabilities have been accounted for must be owned by the owners, by equity. These are listed at the bottom of the balance sheet because the owners are paid back after all liabilities have been paid.

Unlike liabilities, equity is not a fixed amount with a fixed interest rate. Any time the value of assets change—perhaps you receive more in cash from a sale than the value of the inventory you sold, or you were forced to write down a truck that was involved in a collision and no longer works—the value of equity changes.

Because the value of liabilities is constant, all changes to assets must be reflected with a change in equity. This is also why all revenue and expense accounts are equity accounts, because they represent changes to the value of assets.

Common line items in the equity section of the balance sheet include:

• Common stock
• Preferred stock
• Treasury stock
• Retained earnings

Together, these line items make up total shareholders’ equity.

To recap, you’ll find the assets (what’s owned) on the left of the balance sheet, liabilities (what’s owed) and equity (the owners’ share) on the right, and the two sides remain balanced by adjusting the value of equity.

The Language of Business

It’s commonly held that accounting is the language of business. Understanding and analyzing key financial statements like the balance sheet , income statement, and cash flow statement is critical to painting a clear picture of a business’s past, present, and future performance. Knowing what goes into preparing these documents can also be insightful.

On a more granular level, the fundamentals of financial accounting can shed light on the performance of individual departments, teams, and projects. Whether you’re looking to understand your company’s balance sheet or create one yourself, the information you’ll glean from doing so can help you make better business decisions in the long run.

Want to learn more about what’s behind the numbers on financial statements? Explore our eight-week online course Financial Accounting —one of our online finance and accounting courses —to learn the key financial concepts you need to understand business performance and potential.

(This post was updated on January 31, 2023. It was originally published on June 9, 2016.)

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What Is a Balance Sheet?

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What is a balance sheet?

Need to quickly figure out if you’re making money or losing it? Then you need a balance sheet.

A balance sheet is a straightforward (but crucial!) financial document that balances your assets against your liabilities and equity . Luckily for the busy business owner, they’re pretty easy to create and read: one half of the sheet lists what your business owns while the other half lists how much you owe, along with how much of the company you or your shareholders own.

The information on a balance sheet gives you, your lenders, and your investors a quick overview of your business’s current financial health. In other words, when you need to take your business’s temperature, a balance sheet is your thermometer.

And along with a  profit and loss statement  (also called an income statement) and a  cash flow statement , a balance sheet is one of your business’s most essential financial documents. You’ll be drawing up a lot of balance sheets, and if you want your business to stay in the black, you need to know how balance sheets work, how you read them, and how you can create your own.

If you're searching for accounting software that's user-friendly, full of smart features, and scales with your business, Quickbooks is a great option.

What information is on a balance sheet?

Balance sheets draw on a simple equation, which is also one of the most basic accounting principles:  assets = liabilities + equity . Of course, when we say “simple,” what we  really  mean is “less complicated than taxes ,” but then again, what isn’t? So let’s look closer at what each term means:

• Assets  refer to your current cash balance  plus  the dollar amount of anything your company owns, which includes property, equipment, inventory, accounts receivable, and anything else you could liquidate for cash.
• Liabilities  refer to any money owed by your company. Typically, this category includes income tax, rent on office buildings, utility payments, wages paid to employees, and loans from banks and investors.
• Equity  is also called “net worth” or “net assets,” and it’s the amount you or other shareholders would walk away with after debts to non-shareholders get paid off. If you’re the sole owner of your business, you call this  owner’s equity . If external stakeholders own parts of your business, you call this  shareholders’ equity .

Wondering why your assets need to equal both your liabilities and your equity, especially since “net assets” is another term for equity? Honestly, it’s kind of confusing, but try thinking of it like this: the only reason you have assets is because you took out a loan from a bank, accepted money from shareholders, or invested your own money in your business. Since your assets stem from a combination of liabilities and equity, the two halves of the equation need to balance.

So once you have all this information, it’s time to make sure the numbers all balance—or rather, the balance sheet makes sure they balance. Basically, the assets on one half of the sheet should equal the liabilities and equity on the other side of the sheet.

Say you take out a $10,000 loan. That means you have a $10,000 liability—but it also means you have $10,000 in assets. See? Balanced.

That’s obviously the easiest, most simplistic example; alas, creating your first balance sheet won’t be that easy. But that example gets at the basic principle of the thing, which is to make sure your assets, liabilities, and equity are all balanced.

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How can you prepare a balance sheet?

Most business owners choose one of three options to create balance sheets:

• Hiring an accountant or CPA
• Drawing up a balance sheet by hand
• Using accounting software

Using an accountant costs the most but comes with the least amount of risk—after all, an accountant is much less likely to make a balance sheet mistake than the rest of us are. (At least, they’d better be; that’s what we pay them for, right?) Plus, if a calculation is off, the liability lies with your accountant, not with you.

On the other hand, drawing up your own balance sheet is free . . . unless you make a costly mistake. But balance sheets are simple enough that you can catch errors quickly, if not on the current sheet then on the next one you draw up. You can create your own two-column balance sheet using spreadsheet software or even download an easy Excel balance sheet template that helps you put one together.

Accounting software strikes a happy medium between cost and ease. Though you can find good free accounting software , most software brands cost a monthly fee, which can range from under $10 to over $100.

The tradeoff for the cost? As long as you’ve entered your numbers correctly (which sometimes feels like a gamble if your software’s learning curve is sky high), you can generate balance sheets day in and day out without lifting more than a finger.

How can you draw up a balance sheet by hand?

If you’re set on doing your first balance sheet with pen and paper, open up your spreadsheet program or pick up your graphing paper and calculator and let’s get started.

1. List your assets

On the left half of your sheet, list your assets, starting with the most liquid assets and moving to least. Liquid assets are assets you can easily convert to cash, so you’ll want to start with your cash balance, then list the easiest items to cash out on, then the hardest items to cash out.

Another way to think about liquidity is in terms of time. Current assets include everything you can turn into cash within a year or less—such as inventory, like unsold bags from your boutique, or equipment, like your industrial bread maker. Long-term assets are things you couldn’t easily liquidate within a year, including long-term investments and intangible assets like copyrighted logos.

To keep things organized, you’ll want to split up your list of assets by category, or current vs. long term. At the end of each category, list the total; then at the very bottom of the assets column, list the sum total of all the assets.

2. List your liabilities

On the right half of your sheet, list your liabilities, starting with the most current debt owed (i.e., accounts payable, biweekly wages, or utility payments) to the longest-term debt (i.e., a five-year bank loan). Follow the same organization as the assets column, totaling each type of liability and then the sum total liability.

3. List your owner’s equity or shareholders’ equity

On the right half of your sheet—beneath the liabilities section and with its own heading—list your equity. Depending on your small business’s ownership structure, equity could include:

• Stock options, including common stock, treasury stock, and preferred stock
• Retained earnings, or money earned by the owners that they then reinvest in the business
• Paid-in capital, or additional money invested in the company that is not common stock

As with the other categories, total each type of equity, then list the sum total equity.

4. Check the balance

Does your assets section equal your liabilities and equity section? If so, great news: you’re in the clear! But if your liability and equity outweigh your assets, you’ll need to put in a few extra hours as you figure out how to restore the balance.

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The takeaway

Balance sheets offer just one perspective on your business’s financial health—but it’s a crucial one. Alongside profit and loss statements and cash flow statements , balance sheets can help your business grow, grow, and grow some more.

Want to draw up balance sheets on the go? Check out our piece on the best accounting apps for small businesses so you can get a quick look at your business’s health anywhere, anytime.

Related reading

• How to Prepare a Profit and Loss Statement
• What Is a Cash Flow Statement?
• The 7 Best Accounting Software for Freelancers in 2023
• The 7 Best Accounting Software for eBay Sellers in 2023

Assets, liabilities, and equity. See more about what these mean above .

The balance sheet is a financial statement that presents details about a company's assets, equity, and liabilities/debt. It offers valuable insights to analysts, enabling them to evaluate the company's capacity to cover immediate operational requirements, fulfill future debt responsibilities, and distribute profits to stakeholders.

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Balance sheet: definition, components, and example.

A balance sheet is one of the most essential tools in your arsenal of financial reports . It’s used to state a business’s assets, liabilities, and shareholder’s equity at a given point in time, offering a snapshot of everything your business owns and owes and telling you the business’s overall worth. Generally speaking, balance sheets are instrumental in determining the overall financial position of the business.

What exactly is a balance sheet? What should be included in them? What equations go into making one? What are their limitations? And why is it so important to have one for your business? In this article, we’ll explain everything you need to know about a business’s balance sheet.

Key Takeaways  

• Balance sheets are an important kind of financial statement used to look at a snapshot of a company’s finances on a given date, usually at the end of the month, quarter, or year.
• Assets are categorized based on their convertibility, physical existence, and whether they’re needed to operate the business.
• Accounting software is a great way to create accurate balance sheets quickly and easily.

Table of Contents

What Is a Balance Sheet?

Purpose of a balance sheet, balance sheet equation.

• What Goes On a Balance Sheet?

Balance Sheet Example

Importance of a balance sheet, limitations of balance sheets.

• Frequently Asked Questions

A balance sheet is a type of financial statement that reports all of your company’s assets, liabilities, and shareholder’s equity at a given time. It’s a snapshot of the company’s financial health. 

These financial statements are also key for calculating rates of return for your investors and for evaluating the capital structure of your business, both of which are essential processes.

Balance sheets have many important purposes, such as helping you understand your ability to pay for short-term operating expenses, supporting your repayment plan for debts, and ensuring proper distribution to equity-holding business owners. 

Balance sheets can be used to analyze capital structure, which is a combination of your business’ debt and equity. Lenders will factor them into their decisions when doing risk management for credit. These reports are also used to disclose the financial position and integrity of your business (i.e., the overall value of your company), which is vital for attracting investors. Lastly, these statements are legally required to be produced and filed by public companies.

Balance sheets work on a simple formula: 

Assets – Liabilities = Shareholder Equity

What exactly does the above balance sheet formula mean? Let’s break it down into its 3 components:

• Assets: Current and long-term assets owned by the business, including cash, product inventory, property, or equipment
• Liabilities : This is any current, future, long, or short-term liability that the company owes, including rent, taxes, bills, and loans
• Shareholders Equity : This is the value of the company, indicated by shareholders’ funds, retained earnings, and/or the worth of common stock

Let’s go over each of these 3 elements in more detail in the next section. 

What Goes on a Balance Sheet?

The balance sheet details the total assets, liabilities, and owner’s equity of your business at a given point in time. The items reported on these financial statements correspond to the accounts outlined on your chart of accounts . A balance sheet is made up of the following elements:

The assets section of your report breaks down what your business owns. Your report will list your total assets in order of liquidity; that is, it reports assets in order of how easily they can be converted to cash. Assets are categorized as follows:

Convertibility 

This outlines how easily an asset can be converted into cash. Convertibility is broken down into types of assets: 

• Current Assets: Current assets can be easily converted into cash (or an equivalent) in 1 year or less. Examples of current assets include cash on hand or in bank accounts, short-term deposits, loan receivable , stock, and marketable securities.
• Fixed Assets: Fixed assets can’t usually be converted into cash or cash equivalents quickly. Examples of fixed assets include buildings, trademarks, machinery, and equipment.

Physical Existence

Your total assets are further broken down as either tangible or intangible, depending on whether they physically exist or not:

• Tangible: Tangible assets are things you can physically see and feel, such as equipment, supplies, machinery, or property.
• Intangible: Intangible assets are valuable but don’t physically exist in the real world. These include copyrights, brands, trademarks, and patents.

We break assets down even further on a balance sheet by whether they’re considered operating or non-operating assets:

• Operating: These assets are necessary for usual business operations, including property, machinery, or equipment.
• Non-Operating: Non-operating assets aren’t essential for operating the business. They include short-term investments or securities that don’t impact day-to-day business.

Liabilities

The next section on the balance sheet lists the company’s liabilities. Your liabilities are the financial responsibilities that you owe to others, including the outstanding payments to your vendors, loan repayments, and other forms of debt. Liabilities are further broken down into current and long-term liabilities:

• Current Liabilities: These are debts or other financial obligations that must be paid for within 1 year. This could include rent, utilities, taxes, current payments toward long-term debts, interest payments, and payroll payables.
• Long-Term Liabilities: Long-term liabilities are debts or obligations that will need to be paid in more than 1 year from now. These include long-term loans, deferred income taxes, and pension fund liabilities.

Owner’s Equity/Earnings

Owner’s equity (also called shareholders’ equity or stakeholders’ equity, for corporations) refers to:

• The amount of money generated by a business after deducting all the money owed
• The amount of money put into the business by its owners or shareholders
• And any donated capital

In other words, shareholder’s equity is your net assets. Put another way, it’s the amount of money that can go to your shareholders after your debts are paid and your total assets are converted into cash/cash equivalents. On your balance report, it’s calculated using this formula:

Owner’s Equity = Total Assets – Total Liabilities

Here’s an example to help you understand the information to include on your balance sheet. In the example below, we see that the balance sheet shows assets (such as cash and accounts receivable), liabilities (such as accounts payable, credit cards, and taxes payable), and equity. Total liabilities and equity are also added up at the bottom of the sheet—hence the term ‘bottom line’ for this number.

Looking for an even simpler way to create balance sheets that support your business? FreshBooks’ free balance sheet template will help you keep track of all the information you need to manage your numbers with ease, helping you to check balances and keep your finances in order.

Balance sheets are important for determining the financial health and position of your business at a certain point in time. When used with other financial statements and reports (such as your cash flow statement), it can be used to better understand the relationships between your accounts.

Other important insights from your balance sheet include:

By comparing your business’s current assets to its current liabilities, you’ll get a clearer picture of the liquidity of your company. In other words, it shows you how much cash you have readily available. Your total assets should be greater than your liabilities. It’s wise to have a buffer between your current assets and liabilities to at least cover your short-term financial obligations. The data from financial statements such as a balance sheet is essential for calculating your business’ liquidities. 

By comparing your income statement to your balance sheet, you can measure how efficiently your business uses its total assets. For example, you can get an idea of how well your company can use its assets to generate revenue.

Your balance sheet can help you understand how much leverage your business has, which tells you how much financial risk you face. To judge leverage, you can compare the debts to the equity listed on your balance sheet. Leverage can also be seen as other people’s money you use to create more assets in your business.

Balance sheets are important for investors, analysts, accountants, and anyone else gauging the success of a business. However, they also have some limitations to keep in mind. These limitations are Limited Snapshot, Static Data & Potential for Manupulation include:

Limited Snapshot

These financial statements can only show the financial metrics of your company at a single moment in time. While this is very useful for analyzing current and past financial data, it’s not necessarily useful for predicting future company performance.

Static Data

Balance sheets are an inherently static type of financial statement, especially compared to other reports like the cash flow statement or income statement. Analyzing all the reports together will allow you to better understand the financial health of your company.

Potential for Manipulation

Accounting systems or depreciation methods may allow managers to adjust numbers on the balance sheet. This opens up balance sheets to corruption. Some executives may fiddle with balance sheets to make businesses look more profitable than they actually are. Thus, anyone reading a balance sheet should examine the footnotes in detail to make sure there aren’t any red flags.

With a firm understanding of the balance sheet basics, you can use this report to guide financial decision-making in your business. Although it takes time and effort to create an accurate balance sheet from scratch, it is a vital report you as a business owner should have. FreshBooks is here to help and automate the report.

Our accounting software is a fast, easy, reliable way to create a balance sheet. By keeping your business’s financial information up-to-date by switching your accounting process from doing it manually to FreshBooks, creating a balance sheet takes just a few clicks. Try FreshBooks for free!

FAQs About Balance Sheets

Still curious about creating, using, or interpreting balance sheets? Here are a few commonly asked questions—answered:

How do you analyze a balance sheet?

The best technique to analyze a balance sheet to determine the financial health of a business is through financial ratio analysis. There are 2 types of ratios: Financial strength ratios, which, for example, can tell you how well a company can meet its debt obligations, and activity ratios , which focus on current accounts and operating cycle expenses.

Who prepares balance sheets?

Balance sheets are usually prepared by company owners or company bookkeepers. Internal or external accountants can also prepare and review balance sheets. If a company is public, public accountants must look over balance sheets and perform external audits. 

What are the 3 types of balance sheets?

The 3 types of balance sheets are: comparative (compares more than one period simultaneously to help identify trends), vertical (a single column that shows a company’s assets, liabilities, and equity for a given date), and horizontal (a different way of presenting the same information as compared to the vertical balance sheet).

What is a balance sheet versus an income statement?

A balance sheet shows only what a company owns (and owes) on a specific date by displaying assets, liabilities, and equities. An income statement, on the other hand, reports revenues and expenses over a longer period. Balance sheets are used to determine if a company can meet its debt obligations, while income statements gauge profitability.

How do you read a balance sheet for dummies?

The easiest way to read a balance sheet is to keep the formula in mind: Assets = Liabilities + Shareholder Equity. You can look at your company’s balance sheet as having 2 sections—1 for assets, and 1 for liabilities and equity. By adding liabilities and equity together, you’ll get your company’s assets. You can also use the Assets – Liabilities = Equity formula. It’s important for Liabilities to always be lower than the Assets. Otherwise, it would mean that the business is losing money.

Sandra Habiger, CPA

About the author

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

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A balance sheet is a vital financial statement that presents a detailed snapshot of a company’s financial condition at a specific point in time by categorizing its assets, liabilities, and equity

Key Takeaways

• Balance Sheet as an Essential Financial Tool: It is crucial for assessing a company’s financial health, providing a clear overview of its assets, liabilities, and equity.
• Reflecting Financial Position: A balance sheet offers a snapshot of a company’s financial position at a specific point in time, showing the value of Tangible Assets, Current Assets, and Current Liabilities.
• Importance of Equity in Balance Sheets: Equity reflects the owner’s stake in the company, balancing the assets against the liabilities.
• Role of Current Assets and Current Liabilities:  Understanding the balance between Current Assets and Current Liabilities on a balance sheet helps in assessing a company’s short-term financial health.
• Consultation with a Financial Advisor: A financial advisor can provide expert analysis, aiding in better financial decision-making.
• Understanding Owner’s Equity vs. Shareholder’s Equity: Owner’s Equity refers to the owner’s personal stake, while Shareholder’s Equity represents the shareholders’ claims on the company’s assets.
• Comprehensive Financial Analysis: A balance sheet, when read in conjunction with other financial statements, offers a comprehensive view of a company’s financial status.

The balance sheet plays a critical role in financial reporting by offering a clear picture of what a company owns (its assets) and what it owes (its liabilities), along with the Equity value held by its owners or shareholders. Assets are resources controlled by the company, capable of generating future economic benefits. They are classified as either Current Assets, like cash and inventory, which are expected to be converted into cash within a year, or long-term assets like property and equipment. Liabilities represent obligations of the company that result in an outflow of resources, with Current Liabilities due within a year, such as accounts payable, and long-term liabilities like bank loans.

The balance sheet also shows the company’s Equity, which includes Retained Earnings and can be referred to as Shareholder’s Equity or Owner’s Equity, depending on the business structure.

The balance sheet is essential for assessing a company’s liquidity, solvency, and overall financial health. The Current Ratio, calculated from Current Assets and Current Liabilities, is an example of a key financial metric derived from the balance sheet to evaluate a company’s short-term financial strength.

Startup Entrepreneurs

For startup entrepreneurs, the balance sheet is a critical tool in securing funding and managing growth. Consider a startup poised for expansion, seeking investors. The investors scrutinize the balance sheet for insights into the startup’s financial health, assessing current assets, current liabilities, and equity to gauge the company’s stability and growth potential.

It serves dual purposes for startups. It provides financial transparency, presenting a clear view of assets, including fixed assets, and liabilities. It’s an indispensable part of the financial triad, along with the income statement and cash flow reports. Preparing it involves detailing total assets and balancing them against liabilities and equity. This clarity is vital for strategic decision-making, particularly in evaluating short-term financial standing and planning for sustainable growth.

In real-world scenarios, startups utilize balance sheets for strategic decisions such as budget allocation and investment planning. It’s essential for understanding the company’s leverage and liquidity positions. For example, a startup might adjust its focus towards current assets for operational efficiency or manage current liabilities to maintain a healthy current ratio.

Business Students

For business students, understanding a balance sheet is a fundamental skill. As a student, look for case studies where a corporation’s balance sheet is dissected to reveal its financial health. These real-world examples will demonstrate the vital importance of the balance sheet in corporate analysis.

A thorough grasp of balance sheets enables students to evaluate a company’s financial position accurately. They learn to correlate Total Assets, including Fixed Assets, with Current Liabilities and Equity, gaining insights into the company’s operational efficiency and financial stability.

Students should learn to read and analyze balance sheets, understanding the interplay between different financial statements, including the Income Statement and Cash Flow reports. This knowledge is crucial for identifying trends, assessing risks, and making informed financial decisions.

Real-life applications of balance sheet analysis in different industries further bridge the gap between theory and practice. For instance, in manufacturing, the evaluation of Fixed Assets and depreciation policies can significantly influence profitability assessments.

Imagine a small business, “Bella’s Boutique,” a thriving local clothing store. The owner, Bella, decides to expand her business and needs to secure a loan. To do this, she turns to her balance sheet. It clearly displays her Current Assets, including cash from sales and her inventory, alongside her Fixed Assets, like store fixtures and computer systems.

It also lists Bella’s Current Liabilities, such as her outstanding supplier payments, and long-term debts, reflecting the business’s overall financial obligations. Her Equity section shows the amount invested and retained in the business. This detailed financial snapshot is crucial for Bella, as it demonstrates her business’s capacity to manage additional debt.

For SMB owners like Bella, understanding and managing the balance sheet is key to financial health. Creating one involves listing all Assets, balancing them against liabilities and Equity. This process is complemented by analyzing other financial statements, such as the Income Statement and Cash Flow reports, to gain a comprehensive view of the business’s financial standing.

In Bella’s case, her well-managed financial statements proved invaluable. It not only assisted her in securing the loan for expansion but also provided a clear framework for future financial planning.

Pre-Planning Process

In the context of the Pre-Planning Process for startups, the relevance of a balance sheet can vary. Initially, when a business is not yet generating financial data or is in the ideation phase, creating a detailed balance sheet may not be immediately applicable. This stage is often more focused on understanding customer needs, refining core offerings, and outlining a business model, as indicated in the Pre-Planning Process documentation.

As the startup progresses beyond the pre-planning phase and begins actual operations, the balance sheet becomes a critical tool for financial planning and management. It provides a clear view of the company’s financial position, detailing assets, liabilities, and equity. This information is vital for tracking the growth of the business, managing equity stakes, and making informed decisions for long-term sustainability.

While a balance sheet may not be a primary focus during the initial pre-planning stages of a startup, gaining an understanding of it is crucial for entrepreneurs. This knowledge becomes increasingly important as the business grows and starts to generate financial data, making balance sheets an essential component of effective financial management and planning.

Business Plan Document Development

In the Business Plan Document Development process, the inclusion of a projected balance sheet is crucial in the financial planning section. For entrepreneurs developing their business plans, a pro forma provides a forecast of expected Net Assets, Net Income, and Equity positions. This projection is essential for lenders or investors, as it offers a glimpse into the future financial health of the business, showcasing how the company plans to allocate its resources and handle liabilities.

However, if the business plan is still in a conceptual phase, a detailed balance sheet might not be immediately relevant. During early planning stages, entrepreneurs often focus more on defining their business model and market analysis. In these cases, itmight be more generic or simplified, primarily serving as a tool for internal planning rather than for external presentation.

Yet, as the business plan evolves and becomes more detailed, especially in terms of financial projections, it becomes increasingly important. It becomes a key document that lenders and investors review to assess the viability of the business. A well-prepared balance sheet reflects the entrepreneur’s understanding of the business’s financial trajectory, including anticipated Equity growth and Net Income generation, thus playing a critical role in securing funding and support.

Frequently Asked Questions

• What is the difference between assets and liabilities on a balance sheet?

On a balance sheet, assets represent what a company owns, such as Current Assets (cash, inventory) and Intangible Assets (patents, trademarks). Liabilities, on the other hand, are what the company owes, including Current Liabilities (short-term debts) and Long-Term Liabilities (long-term loans).

• How often should a balance sheet be updated and reviewed?

A balance sheet should be updated and reviewed regularly, typically on a quarterly or annual basis. This regular review helps in maintaining an accurate picture of the company’s financial position.

• How does equity fit into a balance sheet?

Equity on a balance sheet represents the owner’s interest in the company. It’s calculated as the difference between total assets and Total Liabilities and includes items like Retained Earnings and contributed capital.

• What are the characteristics of a balance sheet that reflects a strong financial position?

A healthy balance sheet example typically shows a balance of assets and liabilities, with a positive Net Worth. This indicates that the company has more assets than liabilities, suggesting financial stability.

• Why are previous balance sheets important for a business?

Reviewing previous balance sheets allows businesses to track their financial progress over time, identify trends, and make informed decisions for future growth and stability. It’s a vital part of analyzing the company’s historical financial performance.

Related Terms

Also see: Income Statement , Cash Flow , Equity , Financial Projections , Depreciation , Dividend , EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) , Ending Inventory , Startup Assets , Owner’s Equity

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Business Plan Example and Template

Learn how to create a business plan

What is a Business Plan?

A business plan is a document that contains the operational and financial plan of a business, and details how its objectives will be achieved. It serves as a road map for the business and can be used when pitching investors or financial institutions for debt or equity financing .

A business plan should follow a standard format and contain all the important business plan elements. Typically, it should present whatever information an investor or financial institution expects to see before providing financing to a business.

Contents of a Business Plan

A business plan should be structured in a way that it contains all the important information that investors are looking for. Here are the main sections of a business plan:

1. Title Page

The title page captures the legal information of the business, which includes the registered business name, physical address, phone number, email address, date, and the company logo.

2. Executive Summary

The executive summary is the most important section because it is the first section that investors and bankers see when they open the business plan. It provides a summary of the entire business plan. It should be written last to ensure that you don’t leave any details out. It must be short and to the point, and it should capture the reader’s attention. The executive summary should not exceed two pages.

3. Industry Overview

The industry overview section provides information about the specific industry that the business operates in. Some of the information provided in this section includes major competitors, industry trends, and estimated revenues. It also shows the company’s position in the industry and how it will compete in the market against other major players.

4. Market Analysis and Competition

The market analysis section details the target market for the company’s product offerings. This section confirms that the company understands the market and that it has already analyzed the existing market to determine that there is adequate demand to support its proposed business model.

Market analysis includes information about the target market’s demographics , geographical location, consumer behavior, and market needs. The company can present numbers and sources to give an overview of the target market size.

A business can choose to consolidate the market analysis and competition analysis into one section or present them as two separate sections.

5. Sales and Marketing Plan

The sales and marketing plan details how the company plans to sell its products to the target market. It attempts to present the business’s unique selling proposition and the channels it will use to sell its goods and services. It details the company’s advertising and promotion activities, pricing strategy, sales and distribution methods, and after-sales support.

6. Management Plan

The management plan provides an outline of the company’s legal structure, its management team, and internal and external human resource requirements. It should list the number of employees that will be needed and the remuneration to be paid to each of the employees.

Any external professionals, such as lawyers, valuers, architects, and consultants, that the company will need should also be included. If the company intends to use the business plan to source funding from investors, it should list the members of the executive team, as well as the members of the advisory board.

7. Operating Plan

The operating plan provides an overview of the company’s physical requirements, such as office space, machinery, labor, supplies, and inventory . For a business that requires custom warehouses and specialized equipment, the operating plan will be more detailed, as compared to, say, a home-based consulting business. If the business plan is for a manufacturing company, it will include information on raw material requirements and the supply chain.

8. Financial Plan

The financial plan is an important section that will often determine whether the business will obtain required financing from financial institutions, investors, or venture capitalists. It should demonstrate that the proposed business is viable and will return enough revenues to be able to meet its financial obligations. Some of the information contained in the financial plan includes a projected income statement , balance sheet, and cash flow.

9. Appendices and Exhibits

The appendices and exhibits part is the last section of a business plan. It includes any additional information that banks and investors may be interested in or that adds credibility to the business. Some of the information that may be included in the appendices section includes office/building plans, detailed market research , products/services offering information, marketing brochures, and credit histories of the promoters.

Business Plan Template

Here is a basic template that any business can use when developing its business plan:

Section 1: Executive Summary

• Present the company’s mission.
• Describe the company’s product and/or service offerings.
• Give a summary of the target market and its demographics.
• Summarize the industry competition and how the company will capture a share of the available market.
• Give a summary of the operational plan, such as inventory, office and labor, and equipment requirements.

Section 2: Industry Overview

• Describe the company’s position in the industry.
• Describe the existing competition and the major players in the industry.
• Provide information about the industry that the business will operate in, estimated revenues, industry trends, government influences, as well as the demographics of the target market.

Section 3: Market Analysis and Competition

• Define your target market, their needs, and their geographical location.
• Describe the size of the market, the units of the company’s products that potential customers may buy, and the market changes that may occur due to overall economic changes.
• Give an overview of the estimated sales volume vis-à-vis what competitors sell.
• Give a plan on how the company plans to combat the existing competition to gain and retain market share.

Section 4: Sales and Marketing Plan

• Describe the products that the company will offer for sale and its unique selling proposition.
• List the different advertising platforms that the business will use to get its message to customers.
• Describe how the business plans to price its products in a way that allows it to make a profit.
• Give details on how the company’s products will be distributed to the target market and the shipping method.

Section 5: Management Plan

• Describe the organizational structure of the company.
• List the owners of the company and their ownership percentages.
• List the key executives, their roles, and remuneration.
• List any internal and external professionals that the company plans to hire, and how they will be compensated.
• Include a list of the members of the advisory board, if available.

Section 6: Operating Plan

• Describe the location of the business, including office and warehouse requirements.
• Describe the labor requirement of the company. Outline the number of staff that the company needs, their roles, skills training needed, and employee tenures (full-time or part-time).
• Describe the manufacturing process, and the time it will take to produce one unit of a product.
• Describe the equipment and machinery requirements, and if the company will lease or purchase equipment and machinery, and the related costs that the company estimates it will incur.
• Provide a list of raw material requirements, how they will be sourced, and the main suppliers that will supply the required inputs.

Section 7: Financial Plan

• Describe the financial projections of the company, by including the projected income statement, projected cash flow statement, and the balance sheet projection.

Section 8: Appendices and Exhibits

• Quotes of building and machinery leases
• Proposed office and warehouse plan
• Market research and a summary of the target market
• Credit information of the owners
• List of product and/or services

Related Readings

Thank you for reading CFI’s guide to Business Plans. To keep learning and advancing your career, the following CFI resources will be helpful:

• Corporate Structure
• Three Financial Statements
• Business Model Canvas Examples
• See all management & strategy resources
• Share this article

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What is a Business Plan? Definition and Resources

9 min. read

Updated May 10, 2024

If you’ve ever jotted down a business idea on a napkin with a few tasks you need to accomplish, you’ve written a business plan — or at least the very basic components of one.

The origin of formal business plans is murky. But they certainly go back centuries. And when you consider that 20% of new businesses fail in year 1 , and half fail within 5 years, the importance of thorough planning and research should be clear.

But just what is a business plan? And what’s required to move from a series of ideas to a formal plan? Here we’ll answer that question and explain why you need one to be a successful business owner.

• What is a business plan?

A business plan lays out a strategic roadmap for any new or growing business.

Any entrepreneur with a great idea for a business needs to conduct market research , analyze their competitors , validate their idea by talking to potential customers, and define their unique value proposition .

The business plan captures that opportunity you see for your company: it describes your product or service and business model , and the target market you’ll serve. 

It also includes details on how you’ll execute your plan: how you’ll price and market your solution and your financial projections .

Reasons for writing a business plan

If you’re asking yourself, ‘Do I really need to write a business plan?’ consider this fact: 

Companies that commit to planning grow 30% faster than those that don’t.

Creating a business plan is crucial for businesses of any size or stage. It helps you develop a working business and avoid consequences that could stop you before you ever start.

If you plan to raise funds for your business through a traditional bank loan or SBA loan , none of them will want to move forward without seeing your business plan. Venture capital firms may or may not ask for one, but you’ll still need to do thorough planning to create a pitch that makes them want to invest.

But it’s more than just a means of getting your business funded . The plan is also your roadmap to identify and address potential risks. 

It’s not a one-time document. Your business plan is a living guide to ensure your business stays on course.

Related: 14 of the top reasons why you need a business plan

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What research shows about business plans

Numerous studies have established that planning improves business performance:

• 71% of fast-growing companies have business plans that include budgets, sales goals, and marketing and sales strategies.
• Companies that clearly define their value proposition are more successful than those that can’t.
• Companies or startups with a business plan are more likely to get funding than those without one.
• Starting the business planning process before investing in marketing reduces the likelihood of business failure.

The planning process significantly impacts business growth for existing companies and startups alike.

Read More: Research-backed reasons why writing a business plan matters

When should you write a business plan?

No two business plans are alike. 

Yet there are similar questions for anyone considering writing a plan to answer. One basic but important question is when to start writing it.

A Harvard Business Review study found that the ideal time to write a business plan is between 6 and 12 months after deciding to start a business. 

But the reality can be more nuanced – it depends on the stage a business is in, or the type of business plan being written.

Ideal times to write a business plan include:

• When you have an idea for a business
• When you’re starting a business
• When you’re preparing to buy (or sell)
• When you’re trying to get funding
• When business conditions change
• When you’re growing or scaling your business

Read More: The best times to write or update your business plan

How often should you update your business plan?

As is often the case, how often a business plan should be updated depends on your circumstances.

A business plan isn’t a homework assignment to complete and forget about. At the same time, no one wants to get so bogged down in the details that they lose sight of day-to-day goals. 

But it should cover new opportunities and threats that a business owner surfaces, and incorporate feedback they get from customers. So it can’t be a static document.

Related Reading: 5 fundamental principles of business planning

For an entrepreneur at the ideation stage, writing and checking back on their business plan will help them determine if they can turn that idea into a profitable business .

And for owners of up-and-running businesses, updating the plan (or rewriting it) will help them respond to market shifts they wouldn’t be prepared for otherwise. 

It also lets them compare their forecasts and budgets to actual financial results. This invaluable process surfaces where a business might be out-performing expectations and where weak performance may require a prompt strategy change. 

The planning process is what uncovers those insights.

Related Reading: 10 prompts to help you write a business plan with AI

• How long should your business plan be?

Thinking about a business plan strictly in terms of page length can risk overlooking more important factors, like the level of detail or clarity in the plan. 

Not all of the plan consists of writing – there are also financial tables, graphs, and product illustrations to include.

But there are a few general rules to consider about a plan’s length:

• Your business plan shouldn’t take more than 15 minutes to skim.
• Business plans for internal use (not for a bank loan or outside investment) can be as short as 5 to 10 pages.

A good practice is to write your business plan to match the expectations of your audience. 

If you’re walking into a bank looking for a loan, your plan should match the formal, professional style that a loan officer would expect . But if you’re writing it for stakeholders on your own team—shorter and less formal (even just a few pages) could be the better way to go.

The length of your plan may also depend on the stage your business is in. 

For instance, a startup plan won’t have nearly as much financial information to include as a plan written for an established company will.

Read More: How long should your business plan be?  

What information is included in a business plan?

The contents of a plan business plan will vary depending on the industry the business is in. 

After all, someone opening a new restaurant will have different customers, inventory needs, and marketing tactics to consider than someone bringing a new medical device to the market. 

But there are some common elements that most business plans include:

• Executive summary: An overview of the business operation, strategy, and goals. The executive summary should be written last, despite being the first thing anyone will read.
• Products and services: A description of the solution that a business is bringing to the market, emphasizing how it solves the problem customers are facing.
• Market analysis: An examination of the demographic and psychographic attributes of likely customers, resulting in the profile of an ideal customer for the business.
• Competitive analysis: Documenting the competitors a business will face in the market, and their strengths and weaknesses relative to those competitors.
• Marketing and sales plan: Summarizing a business’s tactics to position their product or service favorably in the market, attract customers, and generate revenue.
• Operational plan: Detailing the requirements to run the business day-to-day, including staffing, equipment, inventory, and facility needs.
• Organization and management structure: A listing of the departments and position breakdown of the business, as well as descriptions of the backgrounds and qualifications of the leadership team.
• Key milestones: Laying out the key dates that a business is projected to reach certain milestones , such as revenue, break-even, or customer acquisition goals.
• Financial plan: Balance sheets, cash flow forecast , and sales and expense forecasts with forward-looking financial projections, listing assumptions and potential risks that could affect the accuracy of the plan.
• Appendix: All of the supporting information that doesn’t fit into specific sections of the business plan, such as data and charts.

Read More: Use this business plan outline to organize your plan

• Different types of business plans

A business plan isn’t a one-size-fits-all document. There are numerous ways to create an effective business plan that fits entrepreneurs’ or established business owners’ needs. 

Here are a few of the most common types of business plans for small businesses:

• One-page plan : Outlining all of the most important information about a business into an adaptable one-page plan.
• Growth plan : An ongoing business management plan that ensures business tactics and strategies are aligned as a business scales up.
• Internal plan : A shorter version of a full business plan to be shared with internal stakeholders – ideal for established companies considering strategic shifts.

Business plan vs. operational plan vs. strategic plan

• What questions are you trying to answer? 
• Are you trying to lay out a plan for the actual running of your business?
• Is your focus on how you will meet short or long-term goals? 

Since your objective will ultimately inform your plan, you need to know what you’re trying to accomplish before you start writing.

While a business plan provides the foundation for a business, other types of plans support this guiding document.

An operational plan sets short-term goals for the business by laying out where it plans to focus energy and investments and when it plans to hit key milestones.

Then there is the strategic plan , which examines longer-range opportunities for the business, and how to meet those larger goals over time.

Read More: How to use a business plan for strategic development and operations

• Business plan vs. business model

If a business plan describes the tactics an entrepreneur will use to succeed in the market, then the business model represents how they will make money. 

The difference may seem subtle, but it’s important. 

Think of a business plan as the roadmap for how to exploit market opportunities and reach a state of sustainable growth. By contrast, the business model lays out how a business will operate and what it will look like once it has reached that growth phase.

Learn More: The differences between a business model and business plan

• Moving from idea to business plan

Now that you understand what a business plan is, the next step is to start writing your business plan . 

The best way to start is by reviewing examples and downloading a business plan template. These resources will provide you with guidance and inspiration to help you write a plan.

We recommend starting with a simple one-page plan ; it streamlines the planning process and helps you organize your ideas. However, if one page doesn’t fit your needs, there are plenty of other great templates available that will put you well on your way to writing a useful business plan.

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

Table of Contents

• Reasons to write a business plan
• Business planning research
• When to write a business plan
• When to update a business plan
• Information to include
• Business vs. operational vs. strategic plans

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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A business plan is a document that outlines a company's goals and the strategies to achieve them. It's valuable for both startups and established companies. For startups, a well-crafted business plan is crucial for attracting potential lenders and investors. Established businesses use business plans to stay on track and aligned with their growth objectives. This article will explain the key components of an effective business plan and guidance on how to write one.

Key Takeaways

• A business plan is a document detailing a company's business activities and strategies for achieving its goals.
• Startup companies use business plans to launch their venture and to attract outside investors.
• For established companies, a business plan helps keep the executive team focused on short- and long-term objectives.
• There's no single required format for a business plan, but certain key elements are essential for most companies.

Investopedia / Ryan Oakley

Any new business should have a business plan in place before beginning operations. Banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses.

Even if a company doesn't need additional funding, having a business plan helps it stay focused on its goals. Research from the University of Oregon shows that businesses with a plan are significantly more likely to secure funding than those without one. Moreover, companies with a business plan grow 30% faster than those that don't plan. According to a Harvard Business Review article, entrepreneurs who write formal plans are 16% more likely to achieve viability than those who don't.

A business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction. An established business moving in a new direction might even create an entirely new plan.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. It allows for careful consideration of ideas before significant investment, highlights potential obstacles to success, and provides a tool for seeking objective feedback from trusted outsiders. A business plan may also help ensure that a company’s executive team remains aligned on strategic action items and priorities.

While business plans vary widely, even among competitors in the same industry, they often share basic elements detailed below.

A well-crafted business plan is essential for attracting investors and guiding a company's strategic growth. It should address market needs and investor requirements and provide clear financial projections.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, gathering the basic information into a 15- to 25-page document is best. Any additional crucial elements, such as patent applications, can be referenced in the main document and included as appendices.

Common elements in many business plans include:

• Executive summary : This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services : Describe the products and services the company offers or plans to introduce. Include details on pricing, product lifespan, and unique consumer benefits. Mention production and manufacturing processes, relevant patents , proprietary technology , and research and development (R&D) information.
• Market analysis : Explain the current state of the industry and the competition. Detail where the company fits in, the types of customers it plans to target, and how it plans to capture market share from competitors.
• Marketing strategy : Outline the company's plans to attract and retain customers, including anticipated advertising and marketing campaigns. Describe the distribution channels that will be used to deliver products or services to consumers.
• Financial plans and projections : Established businesses should include financial statements, balance sheets, and other relevant financial information. New businesses should provide financial targets and estimates for the first few years. This section may also include any funding requests.

Investors want to see a clear exit strategy, expected returns, and a timeline for cashing out. It's likely a good idea to provide five-year profitability forecasts and realistic financial estimates.

2 Types of Business Plans

Business plans can vary in format, often categorized into traditional and lean startup plans. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These are detailed and lengthy, requiring more effort to create but offering comprehensive information that can be persuasive to potential investors.
• Lean startup business plans : These are concise, sometimes just one page, and focus on key elements. While they save time, companies should be ready to provide additional details if requested by investors or lenders.

Why Do Business Plans Fail?

A business plan isn't a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections. Markets and the economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All this calls for building flexibility into your plan, so you can pivot to a new course if needed.

How Often Should a Business Plan Be Updated?

How frequently a business plan needs to be revised will depend on its nature. Updating your business plan is crucial due to changes in external factors (market trends, competition, and regulations) and internal developments (like employee growth and new products). While a well-established business might want to review its plan once a year and make changes if necessary, a new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is ideal for quickly explaining a business, especially for new companies that don't have much information yet. Key sections may include a value proposition , major activities and advantages, resources (staff, intellectual property, and capital), partnerships, customer segments, and revenue sources.

A well-crafted business plan is crucial for any company, whether it's a startup looking for investment or an established business wanting to stay on course. It outlines goals and strategies, boosting a company's chances of securing funding and achieving growth.

As your business and the market change, update your business plan regularly. This keeps it relevant and aligned with your current goals and conditions. Think of your business plan as a living document that evolves with your company, not something carved in stone.

University of Oregon Department of Economics. " Evaluation of the Effectiveness of Business Planning Using Palo Alto's Business Plan Pro ." Eason Ding & Tim Hursey.

Bplans. " Do You Need a Business Plan? Scientific Research Says Yes ."

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

Harvard Business Review. " How to Write a Winning Business Plan ."

U.S. Small Business Administration. " Write Your Business Plan ."

SCORE. " When and Why Should You Review Your Business Plan? "

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What Is a Balance Sheet?

Definition & Example of a Balance Sheet

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

How a Balance Sheet Works

Sample balance sheet, do i need a balance sheet.

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A balance sheet is a statement of the financial position of a business that lists the assets, liabilities, and owners' equity at a particular point in time. In other words, the balance sheet illustrates a business's net worth.

Learn more about what a balance sheet is, how it works, if you need one, and also see an example.

The balance sheet is the most important of the three main financial statements used to illustrate the financial health of a business. The other two are the income statement and cash flow statement.

A balance sheet helps business stakeholders and analysts evaluate the overall financial position of a company and its ability to pay for its operating needs. You can also use the balance sheet to determine how to meet your financial obligations and the best ways to use credit to finance your operations. 

The balance sheet may also have details from previous years so you can do a back-to-back comparison of two consecutive years. This data will help you track your performance and identify ways to build up your finances and see where you need to improve. 

Alternate name: Statement of financial position

It's a good idea to have an accountant do your first balance sheet, particularly if you're new to business accounting. A few hundred dollars of an accountant's time may pay for itself by avoiding issues with the tax authorities. You may also want to review the balance sheet with your accountant after any major changes to your business.

All accounts in your general ledger are categorized as an asset , a liability, or equity. The items listed on balance sheets can vary depending on the industry, but in general, the sheet is divided into these three categories.

Assets are typically organized into liquid assets, or those that are cash or can be easily converted into cash, and non-liquid assets that cannot quickly be converted to cash, such as land, buildings, and equipment. They may also include intangible assets, such as franchise agreements, copyrights, and patents.  

Liabilities

Liabilities are funds owed by the business and are broken down into current and long-term categories. Current liabilities are those due within one year and include items such as accounts payable (supplier invoices), wages, income tax deductions, pension plan contributions, medical plan payments, building and equipment rents, customer deposits (advance payments for goods or services to be delivered), utilities, temporary loans, lines of credit, interest, maturing debt, and sales tax and/or goods, and services tax charged on purchases.  

Long-term liabilities are any that are due after a one-year period. These may include deferred tax liabilities, any long-term debt such as interest and principal on bonds, and any pension fund liabilities.   

Equity, also known as owners' equity or shareholders' equity, is that which remains after subtracting the liabilities from the assets. Retained earnings are earnings retained by the corporation—that is, not paid to shareholders in the form of dividends.

Retained earnings are used to pay down debt or are otherwise reinvested in the business to take advantage of growth opportunities. While a business is in a growth phase, retained earnings are typically used to fund expansion rather than paid out as dividends to shareholders.  

COMPANY NAME BALANCE SHEET as at __________ (Date)

An up-to-date and accurate balance sheet is essential for a business owner looking for additional debt or equity financing, or who wishes to sell the business and needs to determine its net worth.

Incorporated businesses are required to include balance sheets, income statements, and cash flow statements in financial reports to shareholders and tax and regulatory authorities.   Preparing balance sheets is optional for sole proprietorships and partnerships, but it's useful for monitoring the health of the business.

Key Takeaways

• Balance sheets are an important tool for assessing and monitoring the financial health of a business.
• They typically include assets, liabilities, and owners' equity.
• The U.S. government requires incorporated businesses to have balance sheets.

U.S. Securities and Exchange Commission. " Beginners' Guide to Financial Statement ." Accessed June 20, 2020.

QuickBooks. " What Are Current Liabilities? – Definition and Example ." Accessed June 20, 2020.

FreshBooks. " What Is Liability in Accounting? " Accessed June 20, 2020.

Corporate Finance Institute. " Retained Earnings ." Accessed June 20, 2020.