Free Balance Sheet Template [Excel Templates]

The functionality and value of any company significantly depend on its financial status. Therefore, you need a well-crafted balance sheet to determine your worth as a company, to know what you own and your liabilities. In addition, a balance sheet allows the executives, investors, stakeholders, and employees to know the business’s previous, current, and prospective financial status.

Moreover, the financial status of your organization can make you determine the financial path you will take and the profits you are likely to generate. Note that a balance sheet offers you an internal and external analysis of the business’s financial performance.

In this article, we will discuss what a balance sheet is, how it works, and its pros and cons. Furthermore, this article will address that:

• A balance sheet provides a brief overview of the previous and current status of the company’s finances.
• The balance sheet highlights and reports the business’s assets, shareholder equity, and liabilities.
• The balance sheet is a financial statement used to evaluate the business’s success in a given period.
• Financial analysts use a balance sheet to calculate and assess the profits and losses made by the company compared to its competitors.
• The balance sheet associates and equates the company’s assets and possessions with shareholder equity and liabilities.

What is a Balance Sheet?

A balance sheet is also a statement of financial position or net worth.

A balance sheet is a financial statement used by an organization to provide a detailed analysis of its assets, liabilities, and equity. For a business to balance its finances, you need effective ways of increasing your hourly income and lowering your hourly cost and spending.

Notably, a balance sheet is usually divided into two sections. One section (the left side) highlights the assets owned by the organization. The right section outlines the business stakeholder’s equity and liabilities.

How Does It Work?

A balance sheet provides a brief statement of the company’s financial status at a given time. A balance sheet should be compared with the previous ones; this allows the company’s management to see the financial progress made over a certain period.

Stakeholders, potential investors, and collaborators use a company’s balance sheet to gauge and analyze its financial well-being. For example, the investors can use the balance sheet to originate the number of ratios in the company, including the acid-test and debt-to-equity ratios. In addition, cash flow and income statements can be assessed and analyzed together with the balance sheet; this provides the company’s management and investors with an overview of the business’s past, current, and prospective financial status.

A balance sheet balances the company’s assets and the shareholder’s equity and liabilities. So, for example, if an investor puts $6000 in a company, the assets of the company will increase by $6000, and so will its shareholder equity. This means that the assets and the shareholder equity balance out.

It is essential to use a balance sheet when assessing and listing your company’s finances. However, this financial statement also has its limitations.

Below are some of the benefits and disadvantages of using a balance sheet:

Advantages

Some of the advantages include the following:

Insight into the operations of the company

It provides investors and other outside parties with a glimpse of the company’s operations. This way, these parties can make better decisions regarding whether they will invest in the company.

Know-how of financial standing

This document highlights the financial standing of an organization. It provides details of how much the company owns, how much debt it has, and even how much it is owed.

Provide a picture of liquidity

Since the balance sheet compares the company’s current assets to its current liabilities, this document provides insight into its liquidity. This means that, as a company, you should have more current assets than current liabilities.

Show the company’s leverage

This financial statement allows a company to understand its leverage based on the financial risk it is taking. This way, a company can determine whether the debts they took to purchase an asset may or may not surpass the income expected from the asset.

Efficient

A balance sheet can also be used alongside other financial statements, such as an income statement, to determine how efficiently the company manages its assets.

Rates of return

Another importance of using this document is that it helps to determine how well an organization generates returns. The three types of rates of return that can be calculated using a balance sheet include Return on Equity (ROE), Return on Assets (ROA), and Return on Invested Capital (ROIC).

Determine risk

With a balance sheet, a company has a list of what they own and what they owe. That means a company can quickly determine if they have too many debts or enough assets to turn into cash and meet their business needs.

Secure capital

Lenders must see a company’s balance sheet before providing a business loan. This document will provide lenders and private investors with the required information to assess and provide an organization with the needed capital.

Lure and retain talent

You can lure and retain great employees if you disclose your balance sheet, especially for public companies. This document provides details of how stable your company is, which is an essential aspect that most employees consider before accepting job offers. They understand that their jobs are secure since you are smart about making financial decisions.

Limitations 

The limitations of using a balance sheet are as follows:

Narrow scope of timing

A balance sheet provides the company’s financial status scope over a specific period. Therefore, with this narrow scope of timing, it is challenging for investors to know the accurate financial performance of the company.

Different accounting systems

There are various accounting systems that managers use when generating a balance sheet. These systems can alter the figures and numbers recorded on the balance sheet to look appealing. Therefore, investors should carefully analyze a balance sheet to ascertain its accuracy.

Materially impact the report

Part or areas of a balance sheet may continually have to be adjusted due to frequent professional judgment. That means specific figures recorded in this financial statement may be estimates or guesses that will affect your final report.

There are specific components that must be included in the balance sheet if you want a clear picture of your company’s financial standing.

These three components are shown below:

Assets

Assets are those resources owned by the company and hold significant economic value, which is vital for the organization’s future. The assets included in the balance sheet include current assets, long-term assets, and other assets:

Current assets

Current assets are also known as short-term assets. These assets are meant to be converted to cash within a year from the date mentioned on the balance sheet. They include the following:

• Inventory- This includes the company’s raw materials and its completed goods
• Accounts receivable- This is the amount the company expects from provided goods and services. It can also be the expected balance from clients or customers due to completed projects
• Prepaid expenses- These are expenses already paid for but are expected in the future
• Cash and cash equivalents- All the company’s money is protected in a bank regarding cash, deposit certificates, savings bonds, and many more.
• Short-term investments- It is also known as marketable securities. These securities can be sold or turned into cash within a short time (3 to 12 months).

Long-term (fixed) assets

Long-term or fixed assets are those resources that are not meant to be converted to cash within a year from the date mentioned on the balance sheet. They include:

• Long-term investments– These are the company plans which are retained for more than one year (12 months). They include stocks, bonds, and even cash.
• Property costs– These are tangible assets owned by the organization, including land and buildings.
• Equipment costs– These are tangible assets owned by the company and may include machinery, vehicles, and fixtures.
• Intangible assets– These are durable but non-physical assets owned by the company. They include patents, copyrights, trademarks, and broadcasting rights.

Other assets

An organization’s remaining assets do not fall under the current or long-term assets category. They include the following:

• Deferred tax income- This is the amount that results from the difference between a company’s payable income tax, according to their accounting, and the total tax expenses reported, based on the tax laws.
• Bond issue costs- These costs result from registration and professional fees due to issuing of bonds by the company.
• Prepaid pension costs- These costs result from providing less or more funds for the pension resources.
• Other assets- Finally, other assets are those resources that are not mentioned under short-term or fixed assets.

Liabilities 

Liabilities are those things that the company owes to third parties outside of the organization, such as financial debts. There are three types of liabilities that you should include in the balance sheet:

Current liabilities

Current liabilities include the total sum of money to be paid to the appropriate party within a year of the date mentioned on the balance sheet. They include the following:

• Short-term debts– These are all the debts that must be paid within a year from the date stated on the balance sheet.
• Wages payable– This is the total sum of money that must be paid to employees after working for the company for a certain period.
• Dividends payable– This is the amount set aside to be divided among the organization’s shareholders but is yet to be distributed.
• Accounts payable– This is the amount owed to creditors and must be paid within a short period, such as 90 days.
• Income tax payable– This is the total amount of tax the organization owes to the state and federal government and is supposed to be paid within a year from the date stated on this financial statement.

Long-term (fixed) liabilities

Fixed liabilities include the total sum of money that is not due to be paid to the required party within a year of the date mentioned on the balance sheet. These liabilities include:

• Long-term debts– This includes debts, mortgages, and notes that are not due to be paid for more than 12 months from the date stated on the balance sheet.
• Capital lease obligations– This includes debts and obligations associated with a capital lease that is not due for payment for more than 12 months from the date on this financial statement.

Other liabilities

These are those liabilities that do not fall under short-term or long-term liabilities. An example of other liabilities include:

• Deferred tax liabilities– These are taxes that should be paid by the company but are not due for a while until a specific date in the future.

Owner’s equity 

Owner’s equity (the company’s worth) is the earnings retained once you subtract your total liabilities from your total assets. It is also referred to as the Shareholders’ or Stockholders’ Equity. Apart from the earnings that remain after subtracting the total liabilities from total assets, the owner’s equity also includes the owner’s investment.

Financial ratios

Financial ratios involve assets, liability, and equity to establish a company’s financial standing. These financial metrics help determine the relationship between two balance sheet components, as shown below:

Assets and liabilities financial ratios

For the relationship between assets and liabilities, the financial ratios include the following:

Debt ratio– This determines the relationship between total liabilities and total assets. It determines the company’s total debts as a percentage of its total assets. The debt ratio indicates whether a company has more debt than assets or assets than debts. A good debt ratio should be 0.4 or lower, that is 40%.

The formula for debt ratio = ^{Total debts}/_{Total assets}

Current ratio– This is the relationship between an organization’s current assets and current liabilities. It is used to establish if a company has proper financial abilities to pay all its current or short-term debts and obligations within one year of the date mentioned on the balance sheet. The excellent current ratio differs from industry to industry but should lie between 0.015 and 0.03, which is 1.5% and 3%.

The formula for current ratio = ^{Current assets}/_{Current liabilities}

Quick ratio– This is the relationship between a company’s current assets and liabilities without involving its current asset inventories. This shows if an organization can pay its current or short-term debts and obligations, using its most liquid assets while excluding its inventory assets, within one year of the date mentioned on the balance sheet.

The formula for quick ratio = ^{(Current assets) – (Inventories)}/_{Current liabilities}

An excellent quick ratio should be equal to or above 1. This is because your company can pay all current debts using its most current (or liquid) assets.

Liabilities and financial equity ratios

For the relationship between liabilities and equity, here is the financial ratio.

Debt to equity ratio– This is the relationship between total liabilities and total shareholders’ equity. This measure determines the amount your company owes its shareholders. A good debt-to-equity ratio should be between 1 and 2; however, it differs from industry to industry.

The formula for debt-to-equity-ratio = ^{Total liabilities}/_{Total shareholders’ equity}

Equity and assets financial ratios

This is the relationship between assets and equity, and its financial ratio is as follows:

Equity multiplier– The equity multiplier indicates the relationship between an organization’s total assets and equity. It measures the financing the company’s shareholders should provide to cover the company’s assets.

It determines if you have enough funds to cover your assets or need higher financing from the shareholders. A lower equity multiplier is good as it means you have fewer debts and are better at covering your assets.

The formula for equity multiplier = ^{Total assets}/_Equity

Information to Include

When preparing the balance sheet, there are specific details that you must include in your financial statement. The information to include is as shown below:

• Start with your company’s name and address
• Include the date which will be used to indicate whether the mentioned assets and liabilities are current or long-term
• Proceed to include all current and long-term assets
• The subsequent details should be about current and long-term liabilities
• The owner’s equity information (data) should follow next
• Finally, include the formulas used to analyze the details in your balance sheet