# How To Prepare a Balance Sheet for a Small Business

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You'll be asked for several specific startup financial statements when you begin a new business. A business balance sheet is one of the most important. Creating one may seem pointless because you don't yet have an ongoing business at this point, but it's still important to state your estimates in writing. A balance sheet achieves this, and it can guide you as well as potential lenders when you apply for a startup loan.

### Key Takeaways

• A balance sheet is a clear explanation of what a business owns and what it owns at various points in time.
• A balance sheet includes two sections, one for assets and one for liabilities.
• A balance sheet gives potential lenders a picture of the position of a business as of the startup date so it can be a valuable component in being approved for startup funding.

## What Is a Balance Sheet for a Small Business?

A balance sheet is a business statement that shows what the business owns, what it owes, and the value of the owner's investment in the business. It's calculated at specific points in time, such as when your business is in the startup phase then at the end of each month, quarter, year, and at the end of the business.

### What Are the Parts of a Balance Sheet?

A balance sheet is organized into two sections. The left-hand side typically lists all the company's assets. The second section on the right lists the firm's liabilities as well as owner's equity for a small business or retained earnings for a corporation.

### The Accounting Equation

The company's total assets must equal the sum of its total liabilities and total owners' equity. The totals must balance. The accounting equation format is the basis for the layout of a balance sheet: Assets = Liabilities + Owner's Equity. This is referred to as the accounting equation.

## Balance Sheet vs. Profit and Loss Statement

A profit and loss statement, sometimes called an income statement, shows the sales and profit activity in a business over time. What was the income and what were the expenses over a certain period of time?

A balance sheet is a snapshot of the business financially at a specific point in time, such as the end of a quarter or year.

### Note

The financial picture of a business is ever-changing, so both statements are necessary to give a complete picture of its financial status.

## Why Does a Business Need a Balance Sheet?

The balance sheet is an important document that provides information for potential lenders who will look for specific information about the business to use in consideration for a startup loan. It's also important to you as the business owner because it gives you a snapshot of the business at various points in time.

The balance sheet shows the financial position of the business as of the startup date for a business startup that doesn't yet have a history. This includes what has actually happened at the current stage of the startup and what will happen before the date the business starts.

## Steps To Create a Business Balance Sheet

All the calculations in this spreadsheet are done as of the date of startup.

### Value of Assets

First list the value of all the assets in the business as of the startup date. This includes cash, equipment, vehicles, supplies, inventory, prepaid items such as insurance, and the value of any buildings or land owned.

Accounts receivable are typically included as an asset, but there should be no amounts owed to the business because the business hasn't started yet.

### Liabilities and Amounts Owed

Next list all liabilities: amounts owed by the business to others. These will include business credit cards, any loans to the business at startup, and any amounts owed to vendors at startup. Add up the total liabilities.

### Assets vs. Liabilities

The difference between assets and liabilities is shown on the balance sheet as "Owner's Equity" for an unincorporated business or "Retained Earnings" for a corporation. This amount is your investment in the business.

## A Balance Sheet Example: Before and After a Loan

One way to present your balance sheet to a lender is to create two versions: one to show the financial position of your new business before the loan you're requesting and one to show your position after the loan.

The first balance sheet shows that the owner has already invested \$13,500 into the business in the form of cash, prepaid insurance, furniture and fixtures.

### Simple Startup Balance Sheet: After the Loan

The second balance shows a \$50,000 loan, which is being used to buy an inventory of products to sell and to add more furniture and fixtures.

A review of the balance sheet shows that the owner has contributed \$13,500 in equity to the startup of the business, mostly in cash, furniture and fixtures.

Offsetting the assets are the liabilities and owner's equity. The current short-term liabilities of \$1,000 might be small debts owed to vendors for some of the office furniture. The long-term liabilities and loans would more likely be for product inventory and structures.

## Which types of inventories does a manufacturing business report on the balance sheet?

A manufacturing business will typically report four types of inventories on its balance sheets: raw materials, work in progress, finished products, and obsolete inventory.

## Where do startup costs go on a balance sheet?

These costs would normally appear as either capital or retained earnings in the equity section of your balance sheet, depending upon whether you're operating as a small business or a corporation.

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