Creating a Balance Sheet

What goes up must come down
What's given out out must come in

If you're new to business finance, creating a balance sheet can be an overwhelming ordeal. Notwithstanding that the first couple of times you do it, it seldom balances at the first attempt. Fear not, this is where we can give thanks to the founding fathers of bookkeeping history and the principles they invented of double entry bookkeeping. This simply states that wherever you want to enter something into your balance sheet, there must be an opposite and equalizing value somewhere else in your balance sheet, even if it is getting added into a pool with some other values.

Balance Sheet Categories

Before you move onto creating a balance sheet, look at this example balance sheet template here. You can see that the balance sheet is broken down into categories. Each of these balance sheet categories aims to impart financial information to the reader about a certain aspect of the business. Here's a quick run down of what they are:

Fixed Assets. This shows the strategic long term assets deployed by the business that it uses to create products, win market share or maintain competitive advantage. They break out into intangible assets (things that you can't really touch, like goodwill, patents and licenses etc) and tangible assets (like production machinery, buildings, vehicles etc)

The next sections are about working capital. Working capital is the difference between Current Assets less Current Liabilities. It is where money is invested and utilised in day to day business operations, also known as the cash cycle. Substantial sums of money can be absorbed by these processes and operations, so it pays to study this area of the balance sheet carefully. Most successful businesses spend significant resources on working capital management

Long term liabilities shows how and where the business has acquired medium term financing to secure sufficient funding to purchase and use the fixed assets, and maybe support the working capital of the day to day operations.

Last but not least, the balance sheet shows the amount of owners funds invested in the business. This can be issued share capital and/or owners loans. Also in this section, is shown the cumulative result of the return or loss on the original invested capital of the business. It is the sum of the profits the business owner has received for taking a risk by starting or buying a business in the first place.

All of these categories may not necessarily be needed by you when you're creating a balance sheet, but it's useful to be aware of the different classes and the items that are carried within them.

Creating Your Balance Sheet

For this example of creating a balance sheet, let's imagine we're just starting up and want to build our opening statement.

After putting the written part of your Ice Cold Gold business plan together, and some preliminary numbers, you decide to invest $8,000.

So after stumping up the cash, the balance sheet looks like this:

So far so good, plus the top line is equal to the bottom line - it balances (Yeah!).

Now you decide to buy a used bicycle with three wheels, that has an ice box and an umbrella. It costs you $2,500. You give up $2,500 of your cash balance, and end up with an ice cream bike instead. So minus $2,500 cash from the $8,000 cash, and plus one bike - a strategic fixed asset of your new business.

Now you're really on a roll. And it balances again. Great. In principle then, you can keeping adding items to your balance sheet in this way. Every time something is spent, something somewhere else is received.

Let's look at one more example transaction for good measure. After performing extensive field tests on every kind of ice cream imaginable, you've decided it's Mrs Bee's Original Dairy Cream Ice Cream that you want to sell on your ice cream cycle.

Mrs Bee comes from a very nice farming family, and is so convinced about the quality of her ice cream that she has sold the first boxes to you with 30 days sales credit.

When you're creating a balance sheet remember, you have to show both sides of the transaction. This time no cash changed hands. What happened was the inventory of your business went up and you created an accounts payable creditor for the ice cream. If the purchase cost of your ice cream was $428 dollars, then inventory value would be up $428 and the value of your accounts payable would be $428.

When you're creating a balance sheet, this is the best and most straightforward way to build it, adding each transaction as it happens. Naturally, if you acquire some bookkeeping software it will take care of the double entry accounting aspects for you.

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